IBA, as the premier business brokerage firm in the Pacific Northwest, is firmly established as a respected professional service firm in the legal, accounting, banking, mergers & acquisitions, real estate, and financial planning communities.  Periodically, we will post guest blogs from professionals with knowledge to share for the good of owners of privately held companies & family businesses. The following blog article has been provided by Al Souza and Bryce Hamilton of the Estate Planning Team (https://myept.com/).

The Deferred Sales Trust: A Proven Strategy to Defer Capital Gains Taxes and Protect Your Wealth

How business owners, real estate investors, and high-net-worth families legally defer taxes and keep more of what they’ve built.

Selling a highly appreciated asset—your business, rental portfolio, commercial building, or even your primary residence—can trigger a massive capital gains tax bill. Between federal taxes, state taxes, depreciation recapture, AMT triggers, and the 3.8% Net Investment Income Tax, owners often lose 25%–37% or more of their sale proceeds.

For many people, that tax burden alone is enough to stop them from selling altogether.

The Deferred Sales Trust (DST) offers a legal, proven, IRS-supported strategy that allows sellers to defer capital gains taxes, create structured income, reduce estate exposure, and preserve wealth. Unlike other strategies, the DST does not require buying replacement property, giving assets away, or locking yourself into rigid rules.

This article breaks down how the DST works, who it’s for, and why thousands of sellers nationwide turn to this strategy when preparing to exit highly appreciated assets.

Why Capital Gains Taxes Are a Major Obstacle for Sellers

When you sell an appreciated asset held for more than one year, you owe long-term capital gains tax on the profit. The tax stack can include:

• 15%–20% federal capital gains tax
• 3.8% Net Investment Income Tax
• 5%–13.3% state capital gains tax
• 25% depreciation recapture on real estate
• AGI increases that eliminate deductions or trigger AMT

All taxes must be paid the following tax year—no payment plans, no exceptions.

For business owners and long-term investors, this means potentially losing millions of dollars in a single year. It also means:

• Delaying retirement
• Avoiding diversification
• Staying “locked in” to complicated properties
• Postponing the sale of the business
• Passing tax exposure to heirs

The fear of the tax bill often becomes the biggest barrier to moving forward.

What Is the Deferred Sales Trust (DST)?

The DST is a tax-deferral strategy built on long-standing IRS tax code, trust law, and installment sale regulations. It is not a loophole. It is not aggressive tax planning. Trust law itself predates modern tax law, and installment sales have been used for decades.

A DST allows you to:

• Legally defer capital gains taxes over time
• Defer straight-line depreciation recapture
• Control income timing
• Potentially reduce estate tax exposure
• Eliminate asset-ownership risks
• Pass more wealth to heirs
• Reinvest in diversified or alternative assets

The DST works for nearly any ownership structure—including individuals, LLCs, corporations, and partnerships.

Common qualifying assets:

• Businesses
• Commercial and residential rental properties
• Hotels and hospitality assets
• Industrial complexes and warehouses
• Farmland
• Raw land and development parcels
• Vacation homes and other investment property

If the asset has significant appreciation, the DST may be a fit.

How the DST Works: A Simple Step-By-Step Overview

At its core, the DST is built on the IRS-approved installment sale structure. The key difference is that a specialized trust sits between you and the end buyer. Here’s how it works:

1. You Sell the Asset to a Dedicated Trust

Prior to the sale, you transfer ownership of the asset to a dedicated Deferred Sales Trust. This must happen before the sale to the final buyer.

2. You Receive a Promissory Note—Not Cash

The trust does not pay you cash at closing. Instead, it issues a promissory note (installment sale note) that specifies:

• Payment amount
• Timing and frequency
• Interest rate (typically 6%–8%)
• Whether payments are interest-only, amortized, or deferred

Because you do not receive cash from the sale at this stage, you do not trigger capital gains tax.

3. The Trust Sells the Asset to the End Buyer

The trust then sells the asset to the final buyer, often at the same price. Because the trust’s basis and sale price are similar, the trust typically owes minimal or no capital gains tax.

4. Your Payments Begin—Immediate or Deferred

You decide whether to:

• Start income right away, or
• Defer income for years (strategic for retirement or tax planning)

Each payment you receive includes:

• Return of basis (tax-free)
• Capital gain portion (taxed gradually)
• Interest income

This structure gives you control over your tax exposure year-to-year.

5. The Trust Invests the Proceeds

The DST trustee prudently reinvests proceeds into diversified investments such as:

• REITs
• Bonds
• Annuities
• Marketable securities
• Alternatives
• Other compliant income-producing assets

The objective is to generate sufficient returns to support your installment payments while preserving or potentially growing principal.

The Top Benefits of the Deferred Sales Trust

1. Significant Tax Deferral

The DST allows you to defer 100% of the capital gains tax otherwise due at the time of sale. Instead, you pay taxes slowly as you receive payments.

This can preserve hundreds of thousands—or millions—of dollars that would otherwise be lost immediately to taxation.

2. Estate Tax Advantages

The DST may help “freeze” your estate value and reduce future estate tax liability. With proper planning, the note payments can flow directly to your heirs.

3. Preservation and Growth of Wealth

Because payments can be interest-only or partially amortized, a large portion of principal can remain invested for years, potentially allowing your estate to grow rather than shrink.

4. Liquidity From Illiquid Assets

Selling a business or property converts into a predictable, structured income stream—ideal for retirement or long-term planning.

5. Customizable Retirement Income

You control when payments start, how much you receive, and how the income schedule is structured.

6. Probate Avoidance

When paired with a proper living trust, DST payments can bypass probate entirely.

7. Asset Protection

Transferring the asset into the DST can help eliminate liability exposure associated with ownership—particularly valuable for landlords or business owners.

8. Freedom From 1031 Rules

Unlike a 1031 exchange:

• No like-kind requirement
• No 45-day or 180-day deadlines
• No forced reinvestment
• You can diversify freely

9. More Flexible Than a Charitable Remainder Trust (CRT)

With a CRT, you give away the asset.
With a DST, you keep the principal and pass remaining value to your heirs.

Common Questions About the DST

How are my payments calculated?

You and the DST trustee negotiate payment terms based on your income goals, risk preference, and tax strategy.

What happens if I die?

Your heirs continue receiving payments according to your estate plan. The DST note becomes an inheritable asset.

Can my payments change over time?

Yes. Payment terms can be renegotiated at the trustee’s discretion to adjust for life changes.

Can I terminate the DST?

You can request termination, but doing so triggers the immediate taxation of all deferred capital gains.

What if tax laws change?

You pay taxes based on the rates in effect when payments are received. Typically, tax legislation includes advance notice, giving you time to adjust.

Can I get back into real estate?

Yes. Through compliant DST-to-DST planning, you can reinvest into real estate or other assets.

How does my CPA evaluate this strategy?

DST-trained attorneys and case managers work directly with your CPA to analyze your scenario and confirm compliance.

Who Is the DST Best Suited For?

The Deferred Sales Trust is ideal for:

• Business owners preparing to exit
• Landlords who want passive income
• Real estate investors facing large depreciation recapture
• Retiring owners looking for predictable income
• Individuals who want to reduce estate taxes
• Sellers who don’t want to reinvest into more property
• Anyone concerned about losing 25%–37%+ to taxes at closing

It is especially powerful when:

• The asset has appreciated dramatically
• Your tax bill is seven figures or more
• Liquidity, retirement income, or diversification are priorities
• You want your heirs—not the IRS—to benefit from your hard work

Is the Deferred Sales Trust Right for You?

If you’re preparing to sell a business, investment property, or any highly appreciated asset, the DST may offer significant advantages—tax savings, income planning, estate planning, and flexibility not otherwise available in a traditional sale.

The first step is simple: request a no-cost DST illustration comparing your current tax exposure to what’s possible using a properly structured Deferred Sales Trust.

This illustration shows:

• Your projected tax bill in a direct sale
• Your projected tax bill through a DST
• Your installment income options
• Long-term wealth preservation scenarios

For many owners, the DST is the key to unlocking liquidity, lowering taxes, and securing a more flexible financial future.

If you have questions relating to the content of this article or tax mitigation strategies associated with selling a business, Al Souza would welcome the opportunity to answer them.  Mr. Souza can be reached at (206) 858-3885 and asouza@intellivisorfo.com.

IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, mergers & acquisitions, real estate, accounting, legal, and financial planning communities on subjects relevant to the purchase & sale of privately held companies and family-owned businesses.  IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.