One of the most unique benefits of the Deferred Sales Trust is its ability to rescue an investor from capital gains taxes in the event of a failed 1031 or 721 exchange. In the case of a 1031 or 721 transaction, the investor's sale proceeds from the disposition of an asset go to a qualified intermediary (QI). The QI holds these proceeds on behalf of the investor in order to close on a replacement property to complete the investor's tax-deferred exchange. Should the exchange fail, whereby the funds cannot be reinvested into a property according to IRS guidelines, the funds held at the QI are subject to capital gains and depreciation recapture taxes once released from the QI to the investor.
The Deferred Sales Trust provides a ready solution to this problem by allowing the funds to revert to a trust rather than to the investor. The investor is saved from taking constructive receipt of the funds and bearing the capital gains and depreciation recapture taxes. The investor can tailor his investment contract with the trustee to pay him his funds in a manner that will effectively defer taxes over the installment contract.
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