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

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

Deferred Sales Trusts: Deferring Capital Gains on Asset Sales

Curated by: Rubric Advisors

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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

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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What Is a Deferred Sales Trust?

How the Transaction Works Step by Step

DST vs 1031 Exchange

Eligible Asset Types

Risks and IRS Scrutiny

Costs, Complexity, and Professional Team

When a DST Makes Sense

Related Topics

Installment Sales (Section 453)

Selling Rental Property: Tax Playbook

Top 5 Tips for a Successful 1031 Exchange

What Is a Deferred Sales Trust?

How the Transaction Works Step by Step

DST vs 1031 Exchange

Eligible Asset Types

Risks and IRS Scrutiny

Costs, Complexity, and Professional Team

When a DST Makes Sense

Related Topics

Installment Sales (Section 453)

Selling Rental Property: Tax Playbook

Top 5 Tips for a Successful 1031 Exchange