As any real estate investor knows, timing is everything. Whether you’re exiting a successful property or eyeing your next multifamily deal, the decisions you make between buying and selling will affect your bottom line.
One of the biggest hurdles you face during that transition is taxes, specifically, capital gains taxes that eat into your profits when you sell an appreciated asset. But what if you could legally defer capital gains tax on that real estate? What if you could retain more equity and redirect that capital into your next multifamily investment?
If this sounds like the right fit, then it’s time for a Deferred Sales Trust (DST). This tax deferral strategy can help you sell real estate and defer taxes with greater flexibility than traditional approaches.
Capital Gains Erode Your Investment Power
Let’s say you’re selling a 30-unit apartment complex that’s valued at $4 million. After years of value-add improvements and rising rents, your equity has grown by $2 million, but so has your potential tax liability. Between federal capital gains tax, depreciation recapture, and possibly state taxes, you could easily owe 25% to 35% of that gain to the IRS.
That kind of tax hit both reduces your return and creates limits, especially if you were planning to roll your profits into a larger multifamily property. Those lost funds could reduce your leverage, shrink your down payment, or even force you to lower your target deal size.
Many investors default to the 1031 exchange in these scenarios. While it’s a valid option, it comes with inflexible timelines and restrictions on what you can invest in. The DST offers a more adaptable route.
What Makes a DST Different?
A DST is built around the IRS’s installment sale rules and offers some advantageous flexibility. Instead of receiving the proceeds from your sale directly, you sell the property to a DST, a third-party trust created specifically for your transaction. The DST then sells the asset to the end buyer and holds the proceeds on your behalf.
Because you didn’t receive the funds directly, you can defer capital gains taxes without a 1031 exchange. You don’t owe taxes until you take distributions from the trust.
While the trust holds your proceeds, it can invest them through various avenues, including other real estate deals. You can use the capital inside the trust to fund your next multifamily acquisition without triggering taxes or stocks or Bitcoin. A traditional 1031 exchange can’t offer that flexibility.
Reinvesting in Multifamily Without the 1031 Limitations
With a 1031 exchange, you’re financially liable from the moment your sale closes. You have 45 days to identify a new property and 180 days to close. That doesn’t leave much room to negotiate or wait for the perfect opportunity. As a result, you might feel pressured to overpay or settle for a property that doesn’t meet your long-term objectives.
A DST frees you of this pressure. The trust can hold your sale proceeds while you research markets or wait for distressed assets to surface. You can even partner on multifamily deals where you wouldn’t otherwise meet 1031 requirements, like joint ventures, fund investments, or deals involving different property classes.
For example, imagine you sold a mixed-use property for $5 million. You want to reinvest in a 100-unit multifamily building, but the deal won’t be ready for another nine months. A DST protects your funds and invests in liquid assets during that period. When the opportunity materializes, you can deploy your capital, which is still tax-deferred, into the multifamily deal.
Cash Flow and Income Control
Another advantage of using a DST is the control you have over income. With a 1031 exchange, your entire equity must move into another property to avoid tax, and your cash flow is fully tied to the new property’s performance. But with a DST, you can structure distributions to fit your lifestyle or reinvestment schedule.
For instance, you might choose to take interest-only payments from the trust, preserving the principal and deferring taxes even further. Or you could set up gradual disbursements that align with your desired income stream. This level of control isn’t available in a traditional exchange and is particularly valuable if you’re managing a multi-generational investment strategy.
Wealth Preservation and Estate Planning
Multifamily real estate is a fantastic wealth-building asset. But you must protect that wealth and pass it on strategically. In such cases, DSTs are an invaluable estate planning tool. You can incorporate the DST into your living trust, will, or family limited partnership, allowing future generations to benefit from tax-deferred income and growth.
Because the trust is a separate legal entity, it can also offer a layer of protection from creditors or legal claims. In the event of your passing, your heirs may continue receiving trust distributions, and the DST can be incorporated into your living trust for seamless wealth transfer, depending on how you structure it. This helps ensure that your legacy continues to generate value without being eroded by tax consequences.
It’s Time to Defer Capital Gains Tax on Your Real Estate
Multifamily real estate continues to be one of the most powerful vehicles for long-term wealth generation. But to stay competitive and profitable, you need tools that work smarter. A DST gives you the power to sell appreciated assets, defer taxes, and reinvest in new multifamily opportunities with better clarity and control.
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Infographic
Selling appreciated real estate can trigger significant capital gains taxes, cutting deep into your profits. A Deferred Sales Trust (DST) offers a strategic solution to defer those taxes while preserving equity for future investments. This infographic explores how DSTs work and why they’re especially valuable in multifamily real estate deals.
