If you’re preparing to sell a business, investment property, large stock portfolio, or other highly appreciated asset, you may already be calculating the significant capital gains taxes you’ll owe. For successful business owners, real estate investors, and high-net-worth individuals—especially in high-tax states like California—the numbers can be staggering.
Federal long-term capital gains tax rates can reach 20%, plus the 3.8% Net Investment Income Tax (NIIT). In California, with state income tax rates up to 13.3%, your combined tax burden can approach or even exceed 30%. That’s a substantial amount to lose after years (or decades) of strategic investing and risk-taking.
Most investors are familiar with 1031 exchanges as a way to defer taxes, but these are limited to real estate and require strict reinvestment into similar property. What if you could sell your asset, keep more of your gains working for you, and avoid the rigid rules of a 1031 exchange entirely? That’s where the Deferred Sales Trust (DST) comes in—a powerful but underutilized strategy.
What Is a Deferred Sales Trust?
A Deferred Sales Trust is not a specific trust type under the Internal Revenue Code—it’s a legal and tax strategy that leverages the installment sale rules under IRC §453. Properly structured, it allows sellers of highly appreciated assets to defer recognition of capital gains taxes, often for many years.
Here’s how it works:
- Sell to the DST First – Instead of selling directly to the buyer, you sell your asset to a third-party trust (the DST) in exchange for a secured promissory note.
- DST Sells to the Final Buyer – The DST then sells the asset to the end buyer—often one you’ve already identified.
- Receive Payments Over Time – You receive installment payments from the DST. You only recognize taxable gain as payments are received, spreading your tax liability over many years.
- Reinvest With Flexibility – The DST invests the sale proceeds according to your preferences—stocks, bonds, real estate, private equity, or other approved strategies.
The result: tax deferral, investment flexibility, and a smoother income stream—without the reinvestment restrictions of a 1031 exchange or the irrevocable structure of a charitable remainder trust.
When to Consider a DST
A Deferred Sales Trust can be especially useful when:
- Selling a business, professional practice, or medical office
- Exiting investment real estate without reinvesting in another property
- Liquidating a large stock position or cryptocurrency holding
- Diversifying away from a concentrated asset while deferring taxes
- Planning for retirement with predictable income streams
- Integrating tax deferral into estate planning
For a business sale, see our detailed guide on buying or selling a small business for related considerations.
DSTs for Foreign Investors
DSTs can also benefit foreign nationals and recent immigrants who own U.S.-based assets.
- U.S. Tax Residents (green card holders or those meeting the substantial presence test) are taxed like U.S. citizens on the sale of U.S. property. A DST can help defer this liability.
- Nonresident Aliens (NRAs) selling U.S. real estate face both FIRPTA withholding (15% of the gross sales price) and regular capital gains tax. FIRPTA often results in over-withholding.
In certain cases, a DST may reduce immediate withholding and spread the tax liability over time. But because IRC §§897 and 1445 impose strict rules, careful compliance review is critical—especially when navigating international tax treaties.
The Costs and Requirements
A DST is not a do-it-yourself strategy. It requires:
- Legal structuring by experienced tax counsel
- Coordination with a third-party trustee
- Strict compliance with installment sale rules
Setup fees often range from $25,000 to $50,000+, with ongoing trustee and advisory costs. However, for transactions involving millions in capital gains, the tax savings and wealth preservation often outweigh these expenses.
Our Role in Your DST Planning
The Law Office of Pietro Canestrelli, A.P.C., does not serve as the trustee or primary DST administrator. However, we:
- Evaluate whether a DST fits your overall tax and estate plan
- Coordinate with vetted DST providers and trustees
- Identify compliance risks, especially for foreign investors
- Integrate DST proceeds into retirement, estate, or philanthropic planning
We also help clients facing IRS issues—visit our IRS audit representation page to learn more.
Timing Is Everything
A DST must be set up before your sale closes. The earlier you begin planning, the more flexibility you have in structuring the deal.
If you’re planning a major liquidity event—whether selling a business, investment property, or other appreciated asset—now is the time to explore your options. A properly implemented DST can be a game-changer for preserving wealth, creating flexible reinvestment opportunities, and deferring millions in tax liability.
Contact Us Today
Our firm assists clients across Temecula, San Diego, Riverside, San Bernardino, all of California, and nationwide. We guide high-net-worth individuals, business owners, and investors through complex tax strategies with precision and care.
