Advice Needed on Using a Deferred Sales Trust for Primary Residence Sale

Indianapolis, Indiana
General Real Estate Investing
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Advice Needed on Using a Deferred Sales Trust for Primary Residence Sale

Darron Chadwick
Real Estate Investor · Carmel, IN · Member since 2010 · 15 posts · 1 vote

Hello BP Community,

We're under contract to sell our primary home in Indiana, and I could really use some advice on tax strategies—specifically, a Deferred Sales Trust (DST).

Here are the key details:

  • Purchased in 2010 for $499K

  • Under contract to sell for $2.499M (closing scheduled for December 2, 2025)

  • Current mortgage balance: $94K

  • This leaves us facing a sizable potential tax burden.

From my research, a Deferred Sales Trust seems like the only option to mitigate the tax hit. But I have a few concerns and questions:

  1. 1. Since this is our primary residence, how does a DST interact with the $500K capital gains exclusion?

  2. 2. We will need to use a portion of the proceeds ($800K–$900K) to purchase a new home. Is it possible to access part of the proceeds for that purpose while still using a DST for the remainder?

  3. 3. Could funds in the DST also be used later to purchase a small condo in Florida (as a second home or investment)?

  4. 4. What are the pros and cons of using a DST in this specific situation?

  5. 5. Are there better alternatives we should consider given this is a primary residence sale (e.g., 1031 exchange alternatives, installment        sales, Qualified Opportunity Zone reinvestments, trusts, or other tax strategies)?

  6. 6.  If we also want to make repairs and improvements on rental properties (flooring, drywall, bathroom/roof work, or replacing window      units with mini splits), is there a way to structure things so those expenses reduce our tax burden?

  7. 7. Can we combine the DST strategy with retirement vehicles (Solo 401k, SEP IRA, Traditional IRA) to shelter more of the proceeds, or are those completely separate lanes?

  8. 8.  What about using part of the proceeds for a business vehicle purchase or large equipment (printer, heat press, etc.) under Section   179 or bonus depreciation—could that layer in as well?

  9. 9.  Lastly, are there timing or setup pitfalls we should watch out for with DSTs? (e.g., deadlines before closing, IRS scrutiny, or high fee  structures).

I’d love to hear from anyone who has navigated this with a primary residence sale or who has looked into DSTs more deeply. At this point, I’m trying to balance three goals:

  • Buy a new home comfortably

  • Minimize immediate taxes

  • Reinvest the rest strategically for growth and income

Thanks in advance for any advice or experiences you can share!

—Darron

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Arn CenedellaPro Member
Rental Property Investor · Greenville, SC · Member since 2008 · 786 posts · 1k+ votes
1y

@Darron Chadwick

This is a nice problem to have. 😀

We pay taxes on every dollar we make. And this $2M profit is, I suspect, the easiest money you ever made. I’m all for minimizing taxes paid but I have also seen lots of people get themselves all “balled up” in complicated structures that can cause problems down the road.

I can tell you as a single man I sold my house in San Carlos CA back in 2014 so I only got $250,000 tax exempt. Total gain was say $1.2M. 

I considered turning my house into a rental for 2 or 3 years so I could 1031 out.

At the end of the day, I decided to keep it simple. I sold and took the cash. If I remember I wrote a check for $198,000 to the IRS and maybe like $89,000 to the State of CA. The cash after taxes paid was ALL MINE. I did not have to be concerned with any future tax liability down the road - this money was mine “free and clear”.

By all means investigate options, but there is value in simplicity and freedom with having cash in the bank.

One potential option would be after paying for your new house, invest the rest of the cash in commerical RE, do a cost seq, and take the 100% bonus depreciation. That’s simple. And you continue to have full control of your equity. Of course, investment considerations should always take precedence over tax considerations. - ie don’t buy a dog property to save taxes.

While BP is excellent in many ways, I would caution you against accepting free advice from people you don’t know on BP when hundreds of thousands of dollars are involved.

In my mind, better to spend $10,000 to get advice from someone who really knows this stuff. Not sure how old you are but perhaps estate and trust considerations may enter into the solution.

Arn

[email protected]650-575-6114
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  • Arn CenedellaPro Member
    Rental Property Investor · Greenville, SC · Member since 2008 · 786 posts · 1k+ votes
    1y

    @Darron Chadwick

    This is a nice problem to have. 😀

    We pay taxes on every dollar we make. And this $2M profit is, I suspect, the easiest money you ever made. I’m all for minimizing taxes paid but I have also seen lots of people get themselves all “balled up” in complicated structures that can cause problems down the road.

    I can tell you as a single man I sold my house in San Carlos CA back in 2014 so I only got $250,000 tax exempt. Total gain was say $1.2M. 

    I considered turning my house into a rental for 2 or 3 years so I could 1031 out.

    At the end of the day, I decided to keep it simple. I sold and took the cash. If I remember I wrote a check for $198,000 to the IRS and maybe like $89,000 to the State of CA. The cash after taxes paid was ALL MINE. I did not have to be concerned with any future tax liability down the road - this money was mine “free and clear”.

    By all means investigate options, but there is value in simplicity and freedom with having cash in the bank.

    One potential option would be after paying for your new house, invest the rest of the cash in commerical RE, do a cost seq, and take the 100% bonus depreciation. That’s simple. And you continue to have full control of your equity. Of course, investment considerations should always take precedence over tax considerations. - ie don’t buy a dog property to save taxes.

    While BP is excellent in many ways, I would caution you against accepting free advice from people you don’t know on BP when hundreds of thousands of dollars are involved.

    In my mind, better to spend $10,000 to get advice from someone who really knows this stuff. Not sure how old you are but perhaps estate and trust considerations may enter into the solution.

    Arn

    [email protected]650-575-6114
    1Reply
  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
    11mo

    @Darron Chadwick 

    Since this is your primary home, the first $500K of gain is already tax-free if you meet the 2-out-of-5-year rule. A DST (Delaware Statutory Trust) usually isn't worth it on a residence because you already have that exclusion, and once you pull out cash for a new house, that part is taxable anyway. For most people, it's cleaner to use the $500K exclusion, pay tax on the rest, and then look at reinvesting into rentals or other assets that generate new depreciation.

    Pros of using a DST for your situation:

    • - Potential to defer 100% of the gain above $500K

    • - Diversify into passive investments through the trust

    • - Create a structured income stream

    • - May allow estate planning advantages if structured properly

    Cons:

    • - You lose direct control of the funds

    • - Ongoing trustee and legal fees ($10K to $15K setup plus annual 1 to 1.5% management)

    • - IRS scrutiny risk, DSTs aren’t directly defined in the Code; they rely on private letter rulings and case law

    • - Complexity: You must close through a third-party trustee before receiving funds

    • - Hard to partially use DST and retain liquidity, usually an all-or-some approach

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    • This post does not create a CPA-client relationship. The information contained in this post is not to be relied upon. Readers are advised to seek professional advice

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    • Chris SeveneyBusiness Member
      Moderator
      Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
      11mo

      @Ashish Acharya - you referring to a Delaware statutory trust or deferred sales trust? 

      the original question was on a deferred sales trust 

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  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    11mo

    I don't believe you can use a deferred sales trust to buy a primary residence. Must be investment property from my understanding and you pay tax on the money when you take it out - so not sure it's worth all the headache 

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