Deferred Sales Trust: Definition, Mechanics, Costs, and Risks

• A deferred sales trust (DST) lets you sell a business, real estate, or stock to a third-party trust and pay capital gains tax only as you receive installment payments under IRC Section 453.
• A DST is not a Delaware Statutory Trust; they share an acronym but are legally and functionally different vehicles.
• Setup typically runs $15,000-$45,000 plus 1.0%-1.5% in annual trustee fees, far more than the $750-$1,500 a 1031 exchange intermediary charges.
• The IRS has never issued a ruling blessing the DST as a branded strategy, so irrevocability, trustee risk, and audit exposure are real costs to weigh against the tax deferral.
• For founders exiting a company, a DST is one lever among several, including 1031 exchanges, opportunity zone funds, and installment sales, and the right pick depends on your liquidity needs and risk tolerance.

If you've got a big capital gain coming, maybe from selling a business, a concentrated stock position, or a piece of real estate, and someone's mentioned a "deferred sales trust," you're probably also wondering why it sounds so much like a "Delaware statutory trust" and whether the IRS is actually okay with either one. Let's sort it out.

1. What is a deferred sales trust?

A deferred sales trust (DST) is an irrevocable trust that buys your appreciated asset in exchange for an installment note, then resells it to the real buyer, so you receive payments over years instead of one lump sum and pay capital gains tax only as each payment arrives ^[1][2]. It's built on the installment sale rules in IRC Section 453 ^[2].

Here's the part that trips people up: "DST" also stands for Delaware Statutory Trust, a completely different animal used almost exclusively inside 1031 exchanges for real estate ^[3]. A Delaware Statutory Trust holds title to income property, and the IRS has explicitly ruled that exchanging into one qualifies for 1031 tax-free treatment ^[4]. A deferred sales trust has no such ruling behind it ^[5][6]. Same letters, different legal structures, different tax backing, different risk profile.

2. How does a deferred sales trust actually work?

The mechanics boil down to one move: you don't sell your asset to the buyer, you sell it to the trust first, and the trust sells it to the buyer. Because you never touch the sale proceeds directly, you avoid "constructive receipt" and the capital gain isn't triggered until the trust actually pays you ^[2].

Step by step: you transfer the asset to the trust, the trust sells it to the ultimate buyer and holds the cash, the trustee invests those proceeds in a mix of securities, real estate, or other assets, and the trust pays you back according to a self-directed installment note you negotiated up front ^[2]. You're the beneficiary; a third-party company acts as trustee ^[2]. One wrinkle worth knowing: if your outstanding installment obligations exceed $5 million, Section 453A requires you to pay interest to the IRS on the deferred tax liability itself, which eats into the benefit on very large deals ^[7].

3. What does a deferred sales trust example look like in dollars?

Picture a founder selling a business for $5 million with a cost basis of $1 million, leaving a $4 million capital gain. Instead of paying tax on the full gain in the year of sale, she routes the sale through a DST and sets up a 10-year note paying $500,000 a year.

Each $500,000 payment gets split into three pieces for tax purposes: a return-of-basis portion (not taxed), a capital gain portion (taxed at capital gains rates), and an interest component if the trustee's invested proceeds generate a return (taxed as ordinary income). Spreading the $4 million gain over ten $400,000 annual increments, instead of recognizing it all at once, can keep her out of the highest tax brackets in any single year and gives the trustee a decade to compound the undistributed balance. That's the entire pitch in one sentence: defer, spread, and let the balance work while you wait.

4. How much does a deferred sales trust cost?

A deferred sales trust typically costs $15,000 to $45,000 to set up, plus an annual trustee fee of 1.0% to 1.5% of trust assets ^[6]. Compare that to a standard 1031 exchange, where a qualified intermediary usually charges $750 to $1,500 total ^[8]. The DST is a meaningfully more expensive structure, and that fee drag compounds every year the trust holds your money.

About the author

Ethan Lu

Partner, Phoenix Strategy Group

Ethan Lu is a Partner at Phoenix Strategy Group, where he works as a fractional CFO helping founder-led companies maximize their exit value. He currently oversees more than $200M in client enterprise value and has been part of multiple eight-figure exits. Before PSG he was an asset manager and investor for a San Diego family office, where he sat on the investment committee for more than $1B in assets. A data scientist by training, he holds a B.S. in Mathematics with a minor in Accounting from UC San Diego.

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