What is a Deferred Sales Trust (Is it the better DST?)
What Is a DST?
A DST is a capital gains tax planning strategy that uses an installment sale. Instead of selling an asset directly to a buyer and triggering a hefty capital gains tax liability, you sell the asset to a trust. The trust then sells the asset to the final buyer. Since you are not the seller and do not directly receive the proceeds, you do not immediately owe taxes on the sale.
Instead, you can receive the sale proceeds (or interest only payments) through structured payments from the trust. And you only pay taxes on the principal you receive, rather than the full amount. The trust invests any proceeds it holds on your behalf, allowing your money to keep growing.
This strategy works particularly well if you’re selling an asset with over $1 million in gain and want to preserve liquidity or gain investment flexibility. Assets include business sales, bitcoin, stock, and real estate among others.
Key Advantages of a Deferred Sales Trust
1. Tax Deferral That Preserves Capital
The main appeal of a DST is that it allows you to defer the capital gains taxes associated with your sale. You keep more of your money working for you instead of handing it over to the IRS in the year of sale. With more capital available upfront, you can grow your money faster and structure how you receive your income strategically.
2. Freedom From 1031 Exchange Constraints
The requirements for a 1031 exchange are restrictive. With a 45-day identification window and a 180-day closing requirement, you may face unnecessary pressure to meet these requirements before you're ready. A DST eliminates those timelines and allows you to exit real estate entirely if you wish. You can invest in stocks, REITs, or other asset classes without penalty.
3. Added Flexibility
Instead of being locked into a narrow category of investment options, you can diversify into a mix of investments, including real estate, market portfolios, or bitcoin based on your risk tolerance and long-term goals.
You also decide when and how much income to take, whether that means steady monthly payments, periodic withdrawals, or delaying distributions altogether. For sellers who value choice and prefer tailoring their cash flow to their financial plan, this level of flexibility is a core advantage of the DST.
4. Long-Term Planning
DSTs also align well with long-term wealth planning. By deferring taxes and reinvesting the proceeds, you can build or preserve generational wealth, providing your family or beneficiaries with greater financial stability and control over future distributions.
For example, say you're a California business owner selling a company for $3.5 million. After depreciation and other deductions, the taxable gain might be around $3 million. Without a DST, more than $1 million in taxes could be due immediately. Using a DST, however, allows you to defer those taxes and create a structured income stream.
This approach provides both a financial advantage and greater control over how and when you pay taxes, allowing you to align distributions with your personal and business goals.
Important Points to Consider
1. Complexity Requires Expert Guidance
You can't set up a DST on your own. It requires a team of experienced professionals, including a tax attorney, a trustee, and a financial advisor, all of whom specialize in this niche. While this structure protects your compliance with IRS rules, it adds to the complexity to the transaction and upfront cost of implementing the trust.
You can't simply DIY a DST. You need expert advice on capital gains tax deferral to execute the trust legally and maintain its long-term integrity.
2. Limitations With Initial and Ongoing Costs
If you're selling a smaller asset, the costs of a DST may outweigh the tax deferral benefits. That's because the strategy requires initial setup fees and ongoing management fees. For this reason, high-net-worth sellers who face high capital gains, such as those exceeding $1 million, are generally a more suitable fit.
3. You Don’t Get Immediate Access to All Your Funds
Because you’re deferring capital gains, you don’t get to walk away from the sale with 100% of your funds. Instead, the proceeds are deposited into the trust and paid back to you over time; however, you can take a large one time payment shortly after closing the trust for any personal expenses that you will pay tax on. This isn’t necessarily a downside, but it may not be a suitable option if you require immediate liquidity for a large personal purchase or need.
When Does a Deferred Sales Trust Make Sense?
A DST is generally most valuable when you're selling a highly appreciated asset and facing a significant capital gains event. In these situations, the ability to defer taxes, reinvest strategically, and shape how and when you receive income can have a meaningful impact on your long-term financial plan.
But the suitability of a DST also depends on your goals, your liquidity needs, and your comfort level working with a team of professionals. Ask yourself:
- How large is my tax exposure on this sale?
- Do I need immediate access to the full proceeds, or could I benefit from receiving income gradually over time?
- Am I interested in reinvesting, or is my priority preserving wealth and generating steady distributions?
Your answers to these questions reveal whether a DST aligns with your broader financial strategy. For many sellers, it is a powerful tool, but only when the structure supports their goals, timing, and long-term planning needs
Know the Trade-Offs Before You Commit
A DST offers powerful tax-deferral advantages, but it's not a one-size-fits-all solution. While a DST can give you greater control over how you receive income and reinvest proceeds, that control only works in your favor when the strategy matches your needs and timeline.
Before you move forward, evaluate your priorities, including how much liquidity you need immediately after the sale, how comfortable you are delegating management decisions to a trustee, and whether gradual income or long-term reinvestment fits your broader financial plan. Understanding both its advantages and its constraints ensures you enter the strategy with a clear view of how it supports your financial future.