New Launch - India Real Estate Report 2026.

How does Deferred Sales Trust in real estate finance work?

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A Deferred Sales Trust (DST) is a tax strategy used in real estate where a property seller transfers ownership of an asset to a third-party trust, which then sells the property and holds the proceeds, allowing the seller to defer capital gains tax by receiving installment payments over time rather than a lump sum. It is an alternative to the 1031 Exchange for investors seeking tax deferral flexibility.

How a Deferred Sales Trust Works

  • Seller transfers property to an independent trustee (the DST trustee) before the sale
  • The trustee sells the property to the buyer and holds the net proceeds in the trust
  • Seller receives installment payments from the trust over an agreed period, deferring capital gains recognition
  • Tax is only triggered as each installment payment is received, not at the time of sale

Key Benefits Over Traditional Sale Structures

  • Provides capital gains tax deferral without the strict reinvestment requirements of a 1031 Exchange
  • Seller retains flexibility on how and when to deploy the deferred proceeds
  • Can be used when a suitable replacement property for a 1031 Exchange is not available
  • Allows partial tax deferral if only a portion of proceeds are placed into the trust

Important Risks and Considerations

  • DST structures must be carefully established to satisfy IRS installment sale requirements
  • Independent trustee selection is critical:conflicts of interest must be avoided
  • Not all states recognize DST structures:legal advice specific to the jurisdiction is essential
  • Improper structuring can result in the IRS treating the full sale proceeds as immediately taxable

A Deferred Sales Trust is a sophisticated real estate tax planning tool that offers investors greater flexibility than a 1031 Exchange for deferring capital gains. However, its complexity requires expert legal and tax advisory support to ensure the structure is properly established and fully compliant with applicable regulations.

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