If you’re holding appreciated assets, the next year could shape your financial future. Under current law, some provisions of the 2017 Tax Cuts and Jobs Act are scheduled to expire after 2025, which could result in higher capital gains taxes and lower estate tax exemptions if no legislative changes occur. But you have a window of opportunity to act now. With a Deferred Sales Trust (DST), you can lock in today’s favorable tax rates, defer what you owe, and keep more of your gains working for you.
Timing is everything here. The tax code is changing, and if you plan ahead with your capital gains tax consultant, your net proceeds can keep working for you.
Changes to Expect in 2026
Under current law, long-term capital gains are taxed at rates up to 20%,1 plus a 3.8% Net Investment Income Tax (NIIT)2 for high earners. But with the 2017 Tax Cuts and Jobs Act sunsetting in 2025, those rates may climb. At the same time, estate tax exemptions will shrink, and the NIIT could expand, especially under proposed plans targeting investment income.
If you’re thinking about selling assets in the next couple of years, delaying without a plan could lead to a higher tax bill than you bargained for. Depending on your income and the final tax rules in place, a sale in 2026 could result in a higher tax bill than under current rates, making careful planning especially important.
Why a DST Is a Smart Capital Gains Tax Strategy
A DST offers a legal way for you to defer capital gains taxes upon selling appreciated assets. But it also does something quite powerful: a DST lets you defer paying capital gains taxes now, providing flexibility to manage your exposure to potential future changes in rates.
Here’s how this works. You sell your asset to a using a DST in exchange for an installment note. The trust sells the asset and holds the proceeds. You pay tax only as you receive installment payments, which can be spread over time or even paused. Capital gains tax is triggered only when you receive principal payments; if you are receiving interest-only payments, no capital gains tax is due until principal is repaid. The key advantage with this strategy is that you crystallize the gain at today’s rate, avoiding future increases.
Imagine selling a $5 million commercial property in 2024 and deferring $1 million in taxes. Waiting could expose you to changes in tax rates, so discussing a DST with your tax advisor may help you plan for different scenarios.
Preserve Wealth and Reinforce Flexibility
DSTs do more than help you delay taxes. They provide structure and flexibility that traditional options, like a 1031 exchange, can’t match. For instance, with a 1031 exchange, you’re limited to real estate and must follow strict deadlines: 45 days to identify a replacement property and 180 days to complete the transaction.3
If you’d prefer to defer capital gains taxes without a 1031 exchange, a DST is the way to go. There’s no like-kind requirement, no forced reinvestment timeline, and no need to stay in real estate. You can diversify your reinvestments across stocks and private equity, or even hold funds in cash while you evaluate your next move. For instance, you could:
- Sell highly appreciated crypto and reinvest in income-producing rental properties
- Exit a family business and gradually shift funds into a retirement income strategy
- Diversify out of a single large real estate asset without rolling into another property
A DST opens the door to better opportunities and lets you manage risk on your terms, all while deferring tax and preserving the rates available today.
Avoid the Bottleneck of Last-Minute Planning
With potential tax changes on the horizon, starting your planning early can give you more time to explore strategies and ensure your transaction is structured in the way that best fits your goals.
Here are a few things you can do to stay ahead of the bottleneck:
- Plan before listing or negotiating the sale. Transferring the asset to a properly structured DST before signing a binding agreement may preserve installment sale treatment.
- Work with a qualified capital gains tax consultant early. Having advisors review the structure in advance can help avoid constructive receipt issues, which means stronger IRS compliance and reduced audit risk.
- Align the DST with your estate and liquidity plan. Coordinating the installment note with your broader trust and estate strategy can improve wealth transfer efficiency and prevent unintended estate tax exposure if exemption levels change.
By planning ahead now, you sidestep the year-end rush and give yourself breathing room to structure your transaction properly.
Who Benefits from Using a DST
While anyone with appreciated assets can use a DST, you stand to gain the most if:
- You’re anticipating a large sale
- Your asset has appreciated significantly over time
- You’d like to reinvest but want broader options than a 1031 exchange
- You’re concerned about future tax law changes and want to lock in current rules
- You value flexibility over the rigidity of traditional tax deferral strategies
A DST is also an especially useful strategy if you’re approaching retirement, downsizing your portfolio, or simply want more control over how your wealth moves forward.
Secure Your Position Before the Rules Shift
Tax rates rise and fall with political tides, but smart planning keeps you ahead of the curve. Taking early action with a DST is one way you can protect your gains and maintain control over your wealth, even when tax laws change.
1https://www.irs.gov/taxtopics/tc409
2https://www.irs.gov/taxtopics/tc559#:~:text=The%20net%20investment%20income%20tax%20(NIIT)%20is,can%20exclude%20for%20regular%20income%20tax%20purposes
3https://www.irs.gov/pub/irs-news/fs-08-18.pdf