Capital gains and capital gains taxes are familiar to investors. Gains on capital assets are increases in their value, which are generated when that asset sells. As a result of the sale of a purchase, you will owe capital gains taxes to the IRS.
Investing is different for everyone. The Delaware Statutory Trust (DST) and mutual funds are examples of investments. However, they serve other purposes. Are capital gains treated similarly?
Mutual Funds and Capital Gains Tax
Investment company acts like the Investment Company Act 1940 (the “40 Act”) to regulate mutual funds. The fund requires you to purchase a certain number of shares. Portfolios consisting of equities, bonds, and other assets are then built and maintained using your money and that of other investors.
These assets aren’t held forever by mutual fund sponsors. To generate higher returns, they are constantly selling them. Capital gains distributions are how you receive those returns. Those gains would be credited to your tax return if your assets were sold during a tax year. The payments are prorated if you own more than one share of prorated.
Capital gains distributions from mutual funds, regardless of how long the fund held the assets before they were sold, are taxed as long-term capital gains. Depending on your ordinary income tax rate, you’ll pay capital gains tax at 0%, 15%, or 20%.
A mutual fund share can be sold outright for a different price. Shares sold before a year are taxed at your ordinary income rate if you sell them before a year. The capital gains tax rate applies if you hold the mutual fund shares for one year or longer.
DSTs and capital gains
A Delaware Statutory Trust (DST) is also a pooled investment. An investor in a DST buys fractional shares in a trust, which pools funds to purchase real estate. There are, however, several differences between a DST and a mutual fund. In addition, DSTs are pass-through entities. Your ordinary income tax rate applies to any pproratedDST rental income you may receive. You may be eligible for prorated real estate expenses as a DST beneficiary. It is possible to lower your payment by using these expenses.
DSTs can also be used as 1031 replacement properties under 26 U.S. Internal Revenue Code section 1031. In a 1031 exchange, beneficial interests in a DST may qualify as replacement properties, according to IRS Ruling 2004-86. Deferring capital gains and depreciation recapture taxes is possible when exchanging real estate for DST shares. You might pay capital gains taxes when the DST sponsor sells those real estate assets. The capital gains can also be rolled over into another DST.
Treatments to Understand
Investing is not the same as other types of investment. Taxes on capital gains, Delaware Statutory Trusts, and mutual funds are especially relevant to this. Work closely with your professional – and experienced – tax advisor to understand the capital gains treatment for these two types of investments.