I have been doing a series on my favorite ways to defer capital gains, and wanted to highlight one more option. While I wouldn’t go as as to say Deferred Sales Trusts are one of my “favorite” ways to defer capital gains due to their risk & complexity (more on that below), they still can be a great tool for certain individuals & I wanted to highlight DST’s.
Overview:
If you’re looking for additional ways to defer capital gains on the sale of an appreciated asset, a Deferred Sales Trust (DST) may help.
A DST is a strategy where a trust is established by an independent third-party. The trust purchases the appreciated asset from you, and then sells the asset to the ultimate buyer. Following the sale, the trust invests the proceeds. You receive scheduled principal and interest payments, and you’re taxed each year on the interest and on the portion of gain tied to the principal you receive that year (with items like depreciation recapture generally due at sale).
Example:
You sell an ownership in a business that you had held for 5 years and it results in a long-term capital gain of $2M. Instead of one lump sum in 2025, you use a DST with a 10-year pay-back receive approximately $210K each year in interest & principal payments. Without a DST you would have paid taxes on $2M of capital gains in 2025. With the DST you’ll pay taxes on $210K each year.
Why?
So why would someone go through all of those extra steps to sell an asset? Well, perhaps you have a buyer who’s anxious to move forward, but you’re not sure what you want to do with your proceeds yet. A second reason is you don’t need the cash yet, and would prefer to pay your taxes over a number of years. In my opinion, the best reason is to keep your income below certain thresholds to help lower your tax bill! If you keep your adjusted gross income below $600K (married filing joint; for single filers the limit is $533K) your long-term capital gains rate is 15%. Above that it goes to 20%. There is also a pesky Net Investment Income Tax (NIIT) of 3.8% that starts to kick in when your income is above $250K (married filing joint; for single filers it starts at $200K). So by keeping your income below those levels you can pay less taxes!
Important Considerations:
It is important to note that DST’s are definitely a more aggressive & risky tax strategy. To date the IRS has not issued any public guidance on utilizing DST’s or issued any opinions or rulings “blessing” them. While DST’s are based on the rules of Installment Sales (which are governed by Internal Revenue Code § 453), they go beyond the routine application of typical installment sales, and so are more uncertain and open to audit risk. Due to their risk & complexity, when using a DST it is extremely important to ensure you’re worked with a trusted partner.
They are also expensive. Setting up a DST and then maintaining it can incur additional legal fees that outweigh any tax benefits. Typically DST’s are only used in scenarios where the gain is north of $500K.
The goal of this post is not an exhaustive how-to, but to show you that you do have options for lowering this year’s tax bill. Always involve your CPA and attorney when determining if a DST is right for you. And if you aren’t currently working with a CPA and would like to learn more, please let me know; I’d be happy to help you determine if a DST is right for you.
