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Tax Planning

Deferred Sales Trusts: Deferring Capital Gains on Asset Sales

Deferred Sales Trusts let you sell highly appreciated assets, businesses, real estate, or stock, while spreading capital gains tax over time through installment payments.

Deferred Sales Trusts: Deferring Capital Gains on Asset Sales

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What Is a Deferred Sales Trust?

  • A DST is an irrevocable trust that acts as an intermediary between you and the buyer of your asset
  • You sell the asset to the trust, and the trust then sells it to the end buyer at market value
  • The trust pays you over time through an installment note, spreading the taxable gain across years
  • Because you receive proceeds gradually, you only owe capital gains tax as payments arrive
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Full Guide

What Is a Deferred Sales Trust?

  • A DST is an irrevocable trust that acts as an intermediary between you and the buyer of your asset
  • You sell the asset to the trust, and the trust then sells it to the end buyer at market value
  • The trust pays you over time through an installment note, spreading the taxable gain across years
  • Because you receive proceeds gradually, you only owe capital gains tax as payments arrive

How the Transaction Works Step by Step

  • You transfer the appreciated asset into the DST before any sale agreement is finalized with a buyer
  • The trust sells the asset to the third-party buyer and receives the full sale proceeds
  • The trust invests the proceeds in a diversified portfolio to fund your future installment payments
  • You receive structured payments, typically over 10 to 30 years, and pay tax only on each installment

DST vs 1031 Exchange

  • A 1031 exchange only applies to real estate, while a DST works with businesses, stock, and other asset types
  • 1031 exchanges require you to reinvest in like-kind property within strict timelines, DSTs have no such requirement
  • DSTs provide cash flow through installment payments rather than locking capital into a replacement property
  • 1031 exchanges are well-established in tax law, while DSTs face more IRS scrutiny and legal uncertainty

Eligible Asset Types

  • Privately held businesses and partnership interests are among the most common DST candidates
  • Real estate, including rental properties, commercial buildings, and land, qualifies for a DST
  • Concentrated stock positions with large unrealized gains can be sold through a trust structure
  • Collectibles, intellectual property, and other appreciated assets may also be eligible depending on structure

Risks and IRS Scrutiny

  • The IRS has not issued specific guidance endorsing DSTs, which creates legal uncertainty for participants
  • If the IRS determines the transaction lacks economic substance, the entire gain could be taxed immediately
  • The step transaction doctrine is a key risk, the IRS may argue the trust was merely a pass-through entity
  • Proper documentation and genuine independence of the trust are essential to withstand an audit

Costs, Complexity, and Professional Team

  • Setup costs typically range from $25,000 to $75,000 or more, including legal, trustee, and administrative fees
  • Ongoing annual fees for trust administration and investment management add to the total cost
  • You need a qualified trust company, tax attorney, CPA, and financial advisor working in coordination
  • The complexity makes DSTs most practical for asset sales of $2 million or more where tax savings justify costs

When a DST Makes Sense

  • You are selling a highly appreciated asset and face a capital gains tax bill exceeding several hundred thousand dollars
  • You want income diversification rather than reinvesting proceeds into a single replacement property
  • You are nearing retirement and prefer steady installment income over a lump sum with a large tax hit
  • You have explored simpler alternatives like 1031 exchanges or charitable remainder trusts and they do not fit your situation
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