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What is a Deferred Sales Trust?
A Deferred Sales Trust, governed by IRC Section 453, is a legal strategy that allows an investor to sell property to a trust in return for installment payments over a specified period. This setup enables the investor to defer capital gains taxes, offering flexibility in how and when they receive income. By deferring taxes, the investor can reinvest the full sale proceeds, potentially growing their wealth while managing the overall tax burden more effectively over time. This approach is particularly beneficial for those looking to optimize long-term financial and tax planning.
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Eligible Asset Types
Business Sale
Shelter proceeds from selling a business while maintaining future investment flexibility.
Real Estate
Defer capital gains taxes from selling investment properties or primary residences.
Securities
Liquidate large stock portfolios without immediate tax consequences.
Crypto Currency
Protect gains from selling digital assets like Bitcoin or Ethereum.
DSTs can be used to defer capital gains taxes on various appreciated assets such as real estate (residential, commercial, or investment properties), businesses or business interests, stocks and securities, artwork, collectibles, and intellectual property. These trusts offer a flexible strategy for individuals looking to sell high-value assets while minimizing tax liabilities.
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Why should you defer capital gains taxes?
Preserve more of your wealth now and maintain flexibility for future financial planning.
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Tax Savings
By deferring capital gains taxes, you can avoid an immediate large tax bill, allowing you to keep more of your proceeds upfront.
Flexibility
Deferring taxes provides more flexibility in how and when you receive payments or reinvest, giving you greater control over your financial planning.
Wealth Growth
Instead of paying taxes right away, you can reinvest the full sale amount, which may lead to higher returns and the potential to grow your wealth faster.
Estate Planning
Deferring capital gains can also help with estate planning by preserving more wealth for your heirs and providing options to pass assets on in a tax-efficient manner.
How does it work?
The DST allows you to sell highly appreciated assets—like real estate or businesses—without paying capital gains taxes upfront. Instead, your proceeds go into a trust that reinvests them, providing you with a steady income stream. This approach defers taxes, giving you more control over your wealth and greater flexibility in how and when you invest. It’s a smart way to manage large capital gains while keeping more money working for you.
Your capital gain from an investment is the difference between the amount you sell it for and your “basis” in that investment. Generally, your basis is the original purchase price or the fair market value at the time you acquired the asset.
To minimize a large tax bill, you might be able to structure the sale or transfer of your investment property in a way that allows you to defer paying capital gains taxes. A 453 Trust, also known as an “installment sale,” is a tax-deferral strategy designed for investors dealing with capital gains taxes.
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What's the process?
- Transfer of Property or Business to the Trust: The investor, who owns a highly appreciated asset such as real estate or a business, transfers the property or business to a trust. This step initiates the 453 Trust process.
- Trust Sells the Asset: The trust, now holding the asset, sells it to a buyer. Instead of the investor receiving the proceeds directly, the trust receives the payment from the sale.
- Sale Proceeds Held in Trust: The trust receives the full payment from the buyer. The proceeds from the sale are now held in the trust, deferring any capital gains taxes that would have been owed if the investor received the proceeds directly.
- Proceeds Invested: The funds from the sale are then invested according to the terms of the trust. This allows the investor to grow the proceeds through various investment strategies, while still deferring taxes.
- Installment Payments to Investor: Over time, the income generated from these investments is used to make installment payments to the investor. These payments satisfy the terms of the installment contract, spreading the capital gains tax liability over a period of time, rather than paying it all at once.
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Shane Styne
CEO | Financial Professional
Shane Styne is the visionary CEO of Top Notch CPAs, leading with faith, family values, and fearless ambition. From humble beginnings to the executive ranks of an S&P 500 company, Shane’s journey is a testament to hard work, calculated risk-taking, and decisive leadership.
Shane Styne
CEO| Financial Professional
Shane Styne is the visionary CEO of Top Notch CPAs, leading with faith, family values, and fearless ambition. From humble beginnings to the executive ranks of an S&P 500 company, Shane’s journey is a testament to hard work, calculated risk-taking, and decisive leadership.
A dedicated family man, Shane met his wife at just five years old, and together, they’ve built a life centered on faith and raising their six children. His passion for leadership led him to study under experts like Anthony Bell, sharpening the skills that fueled Top Notch CPAs’ meteoric rise to nearly $4 million in its first year.
Shane credits the firm’s success to his “team of champions”—a handpicked group of professionals who share his vision of excellence. His leadership philosophy is simple: lead by example, make bold moves, and surround yourself with the best.
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Deferred Sales Trust: A Smart Strategy For Capital Gains Tax Savings
For decades, savvy investors, business owners and high-net-worth individuals have sought strategies to legally defer capital gains taxes on the sale of highly appreciated assets. One powerful tool many have turned to for this purpose is a deferred sales trust (DST), structured under the provisions of Internal Revenue Code (IRC) Section 453.
Deferred Sales Trust: A Smart Strategy For Capital Gains Tax Savings
Shane Styne CEO & Founder of Top Notch CPAs
For decades, savvy investors, business owners and high-net-worth individuals have sought strategies to legally defer capital gains taxes on the sale of highly appreciated assets. One powerful tool many have turned to for this purpose is a deferred sales trust (DST), structured under the provisions of Internal Revenue Code (IRC) Section 453.
The concept of tax deferral through installment sales has been around for a while. Installment sale tax treatment allows sellers to recognize capital gains incrementally over time rather than in a single tax year. This tax provision remains a foundational mechanism for structuring the sale of appreciated assets in a tax-efficient manner.
How A Deferred Sales Trust Works
At its core, a deferred sales trust is an advanced estate planning and tax deferral strategy that allows an asset owner to sell highly appreciated property without immediately incurring capital gains tax.
Instead of selling the asset outright, the owner transfers it to a dedicated third-party trust before the sale occurs. The trust then sells the asset to a buyer and receives the proceeds. Because the seller does not take direct receipt of the funds, the gain is not immediately recognized for tax purposes.
Instead of a lump sum taxable event, the seller receives installment payments over time, spreading out capital gains tax liability across multiple years. This structure is aligned with IRC Section 453, which governs installment sales and allows for tax deferral based on when payments are received.
Benefits Of A Deferred Sales Trust
1. Capital Gains Tax Deferral
By deferring tax liability, sellers can reduce their immediate tax burden, often preserving 15%-28% more of their proceeds that would otherwise be lost to taxation.
2. Flexibility And Versatility
A DST offers flexibility both in terms of which assets can be sold through the structure and how proceeds can be reinvested. Unlike a traditional 1031 exchange (which is limited to real estate reinvestment), a DST allows sellers to defer capital gains on diverse asset types—including businesses, cryptocurrency, commercial real estate and stocks—while gaining the freedom to reinvest proceeds across a broad portfolio of investments such as real estate, stocks, bonds, cash value life insurance and annuities.
3. Protection Against Market Volatility
Sellers can structure payments to align with their financial needs while allowing the trust to invest in assets that provide stable income and long-term growth.
4. Estate Planning And Wealth Transfer Advantages
A DST can be integrated into a broader estate plan, allowing beneficiaries to receive structured distributions while reducing estate tax exposure.
The Drawbacks
1. Complexity And Setup Costs
Setting up a DST requires legal structuring, coordination with a qualified trustee and compliance with IRS regulations. This often involves legal and financial advisory fees, making it less practical for smaller transactions.
The upfront costs and ongoing administrative fees may not be justified unless the asset being sold has a substantial capital gain.
2. Loss Of Direct Control Over Proceeds
Once the asset is sold through the trust, the seller does not receive immediate access to the full proceeds. Instead, they receive installment payments as structured in the trust agreement.
The trustee manages the funds and investments, which means the seller must work with the trustee rather than making direct investment decisions. While this can provide professional oversight, some investors may prefer more direct control over their assets.
Selling A Business With A DST
Consider a business owner who built a company over 25 years, growing its value to $10 million. A direct sale would likely trigger approximately $2 million to $3 million in federal and state capital gains taxes.
By implementing DST, the business owner holds on to the $2 million to $3 million to boost investment growth by transferring the company into the trust before selling it to a buyer. The DST then sells the business and receives the proceeds, allowing the seller to receive payments over many years instead of incurring immediate taxation.
Conclusion
The deferred sales trust can be a powerful tool for investors and business owners seeking to maximize their wealth while reducing tax burdens. When leveraging the tax deferral provisions of IRC Section 453, sellers can optimize their cash flow, retain more control over their investment choices and create long-term financial stability.
DST requires proper structuring, so it is important to seek the assistance of experienced professionals. Given the increasing scrutiny on capital gains tax rates, the deferred sales trust remains a strategic advantage that high-net-worth individuals may want to seriously consider before selling their assets.
For those seeking to preserve their wealth and invest wisely post-sale, DST could represent not just a tax strategy—but a long-term financial planning solution.
The information provided here is not an investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
FAQ
A DST Trust is a legal arrangement that allows you to sell highly appreciated assets, such as real estate or a business, while deferring capital gains taxes. Instead of paying taxes upfront, you can spread out the payments and the tax burden over time through installment payments.
DSTs can be used with various appreciated assets, including:
- Real estate (residential, commercial, or investment properties)
- Businesses or business interests
- Stocks and securities
- Artwork and collectibles
- Intellectual property
A DST may be suitable if you:
- Own a highly appreciated asset you plan to sell
- Want to defer capital gains taxes
- Need flexibility in how and when you receive the sale proceeds
- Are looking for a tax-efficient way to manage your wealth, especially in retirement
While a 1031 Exchange is limited to real estate and requires reinvestment in similar properties, a DSTs applies to a broader range of assets and offers more flexibility in reinvestment.
While traditional trusts are primarily used for estate planning and asset protection, a DST is specifically designed to defer capital gains taxes on asset sales. DSTs also offer more flexibility in investment options and distribution schedules than traditional trusts.
You transfer the appreciated asset to a DST before the sale. The trust then sells the asset to a buyer. Instead of receiving the proceeds directly, you receive installment payments based on a schedule you choose. The sales proceeds remain in the trust, and taxes are deferred until you start receiving payments.
A DST Trust allows you to customize the installment payment schedule to align with your financial needs. This can be especially beneficial in retirement, giving you control over your income stream while managing taxes efficiently.
Yes, a DST can provide several estate planning benefits, including asset protection, wealth preservation, flexible income planning, and potentially reducing the size of your taxable estate.
The primary benefit is the deferral of capital gains taxes. By spreading out your tax liability through installment payments, you can reduce the immediate tax burden and reinvest the proceeds, potentially growing your wealth.
A DST offers significant tax advantages, but it’s a complex structure that may not suit everyone. It’s ideal for individuals with highly appreciated assets looking to defer taxes and manage wealth effectively. However, working with experienced professionals is crucial to ensuring proper setup and management.
Yes, DSTs comply with IRS regulations and offer a strategic way to manage capital gains taxes. Always work with experienced professionals to ensure compliance.
Fees depend on the complexity of your trust setup, typically including legal and trustee fees. Contact us for a detailed quote specific to your situation.
As with any financial tool, there are risks associated with how the funds are reinvested in the trust. Our team will work with you to minimize risks and maximize returns.
The information and services offered on this website are not a substitute for professional legal counsel. We strongly recommend consulting with a qualified attorney for all legal matters.