When it comes to selling highly appreciated assets, many high net worth individuals face a common dilemma: how to defer capital gains taxes while maintaining liquidity, flexibility, and the ability to reinvest. In a recent Deferred Sales Trust Mastermind, financial and tax strategy experts explored how the Deferred Sales Trust can be used as a powerful wealth planning strategy.
What Is the Deferred Sales Trust (DST)?
The Deferred Sales Trust is a tax deferral strategy that allows individuals to sell highly appreciated assets such as real estate, businesses, cryptocurrency, and stocks without immediately recognizing the entire capital gain.
Instead, the seller transfers the asset to a trust in exchange for a promissory note. The trust then sells the asset to the ultimate buyer. The seller receives payments according to the terms of the promissory note, with taxes generally recognized as taxable payments are received.
This structure can provide greater flexibility over the timing of income while allowing more of the sale proceeds to remain invested.
DST vs. 1031 Exchange
While 1031 exchanges are generally limited to qualifying real estate and require strict timelines, the DST offers several potential advantages:
- Applies to highly appreciated assets beyond real estate
- Eliminates the pressure of the 45 day identification and 180 day closing timelines associated with a 1031 exchange
- Provides greater flexibility to diversify across asset classes
- Can help address partnership, liquidity, and estate planning challenges
The Power of Time and Flexibility
Time horizon can be one of the most valuable tools available to an investor. A DST can provide the flexibility to:
- Avoid rushed reinvestment decisions
- Dollar cost average into investments over time
- Reinvest more of the gross proceeds instead of starting with only the amount remaining after an immediate tax payment
This flexibility can allow investors to wait for attractive opportunities, take advantage of changing market conditions, and pursue new investments more thoughtfully.
Client Case Study: From Business Exit to Real Estate Development
One example involved an entrepreneur who exited a successful business and used a DST to defer approximately $2.6 million in taxes.
Rather than immediately paying the entire tax liability and investing what remained, the entrepreneur was able to deploy more of the proceeds toward new investment opportunities, including multifamily real estate development.
Through a properly structured joint venture arrangement involving the trust, additional real estate projects and investment opportunities were pursued. The strategy ultimately created greater flexibility for deploying capital across multiple investments.
This example demonstrates how entrepreneurs may be able to compound wealth by keeping more capital invested rather than immediately losing a significant portion of their proceeds to taxes.
Who Qualifies for the DST?
Ideal candidates may include individuals with:
- $1 million or more in net proceeds and approximately $1 million or more in capital gains
- Highly appreciated real estate, businesses, cryptocurrency, stocks, or other qualifying assets
- A desire to diversify without the pressure of a 1031 exchange
- Significant estate planning needs
- A desire for greater control over the timing and structure of their investment strategy
Every transaction is different, so qualification should be evaluated with experienced tax and legal professionals before a sale occurs.
Estate Planning with DST 2.0
An advanced DST structure may also provide additional estate planning opportunities for high net worth and ultra high net worth families.
Depending on the structure and circumstances, the strategy may help:
- Address potential federal estate tax exposure
- Move qualifying assets and future appreciation outside of the taxable estate
- Provide greater flexibility over how wealth is invested and ultimately transferred
- Coordinate capital gains tax planning with long term estate and legacy planning
For families with significant estates, combining exit planning and estate planning before a major liquidity event can potentially make a substantial difference in the amount of wealth ultimately preserved for future generations.
California Nexus and Moving States
Individuals living in high tax states may also wonder whether moving to another state following a sale changes their tax obligations.
The answer depends heavily on the asset, transaction structure, residency, timing, and applicable state tax laws.
Important considerations can include:
- Where the taxpayer was domiciled when the transaction occurred
- The type and location of the asset being sold
- How principal and interest payments are structured
- When taxable income is recognized
- Whether the asset is tangible or intangible
Because state tax rules can be complex, strategic planning with qualified tax and legal counsel before completing a transaction is essential.
Flexibility of Investments
DST funds can potentially be invested across a broad range of opportunities, including:
- Active or passive real estate
- Stocks, bonds, and other marketable securities
- Private equity
- Private credit
- Business ventures
- Real estate development
The key is maintaining the appropriate separation between the trust and the seller while ensuring investments are structured properly.
Personal use assets generally involve different considerations and may require distributions that create taxable consequences.
Key Takeaways
Flexibility: Avoid forced reinvestment timelines and gain access to a broader range of investment opportunities.
Liquidity: Structure a sale without immediately recognizing the entire capital gain.
Tax Control: Create greater flexibility over when taxable payments are received.
Investment Optionality: Diversify across real estate, securities, private investments, and business opportunities.
Estate Planning: Coordinate capital gains tax planning with strategies designed to preserve wealth for future generations.
Compounding: Keep more capital working and potentially earning returns instead of immediately using a significant portion of the proceeds to pay taxes.
Free Strategy Session
If you’re considering the sale of a highly appreciated asset, proper planning before the transaction can make a significant difference.
A strategy session can help determine whether a Deferred Sales Trust may be appropriate for your situation and how it could fit alongside your investment, tax, estate, and legacy planning goals.