What is a Deferred Sales Trust (DST)?

A Deferred Sales Trust is an advanced tax-deferral strategy used primarily to defer capital gains taxes on the sale of highly appreciated assets, such as real estate, businesses, or other investments. It’s not a type of trust in the traditional sense like a living trust or irrevocable trust, but rather a special arrangement under U.S. tax code using installment sale rules (IRC §453).

How It Works: Step-by-Step

1. Asset Sale Setup

   • Before the sale of your appreciated asset, you (the seller) transfer ownership of the asset to a third-party trust — the Deferred Sales Trust.

   • This must happen before the sale to the final buyer.

2. The Trust Sells the Asset

   • The DST then sells the asset to the intended buyer at fair market value.

   • Since the trust, not you, made the sale, you avoid immediate capital gains tax.

3. Installment Agreement

   • Instead of receiving a lump sum, you (the seller) receive payments from the DST over time through a prearranged promissory note.

   • The terms are flexible — you can structure the note to receive payments monthly, quarterly, annually, or defer them for years.

4. Tax Deferral

   • You only pay capital gains tax as you receive the payments, spreading out the tax hit rather than paying it all in the year of sale.

   • This also can keep you in a lower tax bracket depending on how the payments are structured.

5. Investment Control

   • The DST can reinvest the sale proceeds in a wide variety of investments (stocks, bonds, real estate, cash value index universal life insurance, fixed index annuities, etc.) — potentially growing the amount before it’s paid out to you. Index Universal Life Insurance and Fixed Index Annuities participate in the growth of the stock market and never the losses. 

   • Typically, you can recommend investment strategies, but the trust owns the assets.

Why Use a Deferred Sales Trust?

• Tax Deferral: Avoids immediate capital gains taxes on large transactions.

• Estate Planning Flexibility: Can be integrated into wealth transfer strategies.

• Income Planning: Helps create a predictable income stream.

• Investment Diversification: Proceeds can be reinvested beyond just real estate (unlike a 1031 exchange, which limits you to "like-kind" properties).

⚡️ When Is a DST a Good Fit?

• Selling appreciated real estate, a business, crypto, or high-value collectibles.

• Wanting to avoid the restrictions of a 1031 exchange.

• Looking to spread income over time for tax efficiency.

• Planning retirement or estate transfers.

• Selling in a high-tax state but moving to a lower-tax one.

⚠️ Things to Consider

• Complex Setup: Must work with experienced tax advisors, attorneys, and trustees.

• Fees: Setup and annual maintenance fees can be significant — make sure the tax deferral savings justify the cost.

• IRS Scrutiny: Needs to be properly structured to avoid triggering an audit or early tax consequences.

• Loss of Direct Control: While you advise on investments, the trust technically owns the assets.

Comparing a Deferred Sales Trust (DST) and a 1031 Exchange is super helpful because both are designed to defer capital gains taxes, but they’re used in very different ways. Let’s break it down side by side:

Quick Takeaways

• If you're selling real estate and want to keep your money in real estate, 1031 Exchange is usually the simplest and most cost-effective.

• If you're selling non-real estate assets (a business, stocks, artwork) or want flexible investment options beyond real estate, a Deferred Sales Trust is a powerful option.

• If you’re not ready to reinvest immediately, or you want more control over income timing for tax planning or retirement, DST offers more flexibility.

• If you want to pass the asset to heirs and give them a step-up in basis, 1031 is traditionally more straightforward.

✅ Use a 1031 Exchange When:

• You want to stay fully invested in real estate.

• You can meet the strict IRS timelines.

• You want to avoid capital gains and depreciation recapture taxes.

✅ Use a Deferred Sales Trust When:

• You want to sell an appreciated non-real estate asset or do not want to reinvest the real estate asset proceeds into real estate.

• You want flexible, diversified reinvestment.

• You want to spread income out for retirement or tax bracket planning.

• You’re concerned about the restrictive timing and like-kind requirements of a 1031.
  

Article from our Universal Wealth owners/partners:
How to Avoid Capital Gains on Real Estate Using a Deferred Sales Trust - By Andre Pennington - Forbes Councils Member - Owner of Pennington Law

Deferred Sales Trust: A Smart Strategy for Capital Tax Savings By Shane Styne - Forbes Councils Member - Owner of Top Notch CPA's