Deferred Sales Trusts (DSTs)
Selling a highly appreciated asset doesn't mean you have to hand a massive check to the IRS.
When you sell a highly appreciated asset, the tax bill can be painful. Federal capital gains tax, state income tax, depreciation recapture, net investment income tax, and the loss of future investment control can create a major drag on your wealth.
For some clients, a custom Deferred Sales Trust-style strategy may be worth exploring. This is not the same thing as investing into someone else’s Delaware Statutory Trust fund as part of a 1031 exchange. This is a customized planning structure where you sell your appreciated asset to a properly drafted trust in exchange for an installment note, and the trust then sells the asset to the actual buyer.
The goal is not to “avoid” tax forever. The goal is to potentially defer capital gains tax, spread taxable income over time, keep more capital working for you upfront, and create more flexibility around reinvestment, retirement income, estate planning, and future liquidity.
Who This Strategy Is Best For
You are selling a highly appreciated asset and expect a significant taxable gain.
You do not need all of the sale proceeds immediately.
You want to defer tax and receive payments over time.
You want flexibility beyond a traditional 1031 exchange.
You are comfortable using a formal legal structure with an independent trustee and ongoing administration.
Pros and Cons
The Pros
Potentially defers a large capital gain, preserves more capital for reinvestment, and provides flexible income over time. It can work when a 1031 exchange is not available or desirable.
The Cons
Complex legal structure, attorney involvement required, ongoing administration costs, and less direct control than personally holding the cash. Interest received is taxable.
Why This Is Not a DIY Strategy
The tax result depends heavily on the legal structure and facts. The structure must be real. The trust cannot simply be your personal bank account with a different name. You generally should not be the trustee controlling the proceeds.
The biggest mistake is treating this like a form you download online. The second biggest mistake is assuming it permanently eliminates tax. Used correctly, it may be worth exploring. Used casually, it can create more risk than benefit.