Sell Now, Pay the IRS Later: Defer Capital Gains for Decades 

You’ve built something valuable: perhaps a rental property you’ve held for 20 years, a business worth seven figures, or a block of stock in the private company you helped grow. 

Now you want out, but there’s a shark in the water: the moment you sell, the IRS takes a huge bite out of your profits. Capital gains taxes can easily shred a quarter or more of your windfall before you can reinvest a single dollar. 

What if you could sell today, defer that tax bill for years—even decades—and put the full pre-tax proceeds to work immediately? 

That’s what a deferred sales trust (DST) is designed to do. And if you own highly appreciated real estate or a closely held business, you need to investigate this strategy before you sign a single closing document. 

One note before we start: don’t confuse this with the Delaware statutory trust—the fractional-ownership vehicle that also goes by “DST” in Section 1031 exchange circles. Same initials, completely different animal. (Deferred Sales Trust is also a trademarked term used by a specific promoter network; the underlying technique is simply an installment sale through an independent trust.) 

How a Deferred Sales Trust Works in Practice 

The DST works because of a minor course correction: instead of selling your asset directly to the buyer, you first sell it to an independent, irrevocable trust. The word sell is important here—it’s not a gift or a contribution. It must be a genuine sale, at fair market value, in exchange for an installment note—a legal promise to pay you back over time.

The trust then sells the asset to your buyer for cash. So the entire transaction looks like this:

Because you sold for a note rather than cash, you don’t “realize” the gain all at once. Under IRC Section 453, you pay tax only as you receive payments from the trust. This “installment sale” rule is the engine that keeps your money working.  

Timing matters here. The sale to the trust should be papered and complete before you sign a binding purchase agreement with the end buyer. Get the sequence backwards and the IRS can collapse the steps and treat the trust as a mere conduit—taxing you as if you sold the asset for cash on Day One.

Done right, the trust keeps the full pre-tax sales price working.

Not the after-tax amount.

The full amount.

That means the dollars that would have gone to the IRS stay invested instead—earning returns year after year. In effect, you’ve turned the IRS into a lending partner.

But this type of transaction isn’t for everyone—you need to see if you fit the profile of a DST power user.

How to Know If the DST Is Right for You

The DST is a precision tool, not a Swiss Army knife. It works best when four things are true:

1. You have massive gains. If your selling price is high and your cost basis is near zero, you have the most to lose to taxes and the most to gain from deferral.

2. You hold the right kind of asset. Real estate, a closely held business, private company stock— these qualify. Publicly traded stock does not: the tax code bars installment reporting for securities traded on an established market, so a brokerage portfolio can’t ride this train.

3. You don’t need a lump sum. If you need $3 million in cash on closing day to buy a yacht, stop here—the DST is not for you. But if you want a “personal pension” that pays you a steady income, this is your vehicle.

4. You want out of management. Unlike a Section 1031 exchange, the DST doesn’t force you to buy more real estate within 180 days. You can diversify into stocks, bonds, or even private equity.

If you meet those criteria, the DST offers a level of freedom a standard 1031 exchange simply can’t match.

Breaking the 1031 “Chains”

Real estate investors love the 1031 exchange, but it comes with a “like-kind” ball and chain. You have to identify a new property in 45 days and close in 180 days.If you miss those deadlines, the IRS hits you with the full tax bill. Plus, you’re stuck in real estate for as long as you want to keep deferring.

The DST breaks those chains, so you can step out of the real estate cycle entirely. For example, you can sell the apartment building, pay tax over time, and move the money into a diversified portfolio if that better fits your goals.

No 45-day panic.

No scrambling to identify replacement property.

No staying married to real estate forever.

One caveat, because your heirs will care: the 1031 has an endgame the DST can’t match. Real estate held until death passes to your heirs with a stepped-up basis, wiping out the deferred gain entirely—the classic “swap ’til you drop” play.

An installment note gets no step-up. And upon your death, the deferred gain is “income in respect of a decedent,” so your heirs pay the tax as the payments continue.

The DST is built for sellers who want to exit, diversify, and spend the income during their lifetime. If your plan is to hold real estate until the end and pass it on tax-free, the 1031 chains may be golden handcuffs worth wearing.

The 1031 is a swap. The DST is a clean exit. Which one wins depends on your endgame—but for the seller who truly wants out, the math is compelling. Let’s look at it.

Compounding Your Tax Deferral

Imagine you sell an asset for $2 million with a $200,000 basis.

The direct sale. You pay roughly $428,400 in federal taxes immediately—the top 20 percent long-term rate plusn the 3.8 percent net investment income tax on the $1.8 million gain—before counting any state income tax. You have only $1,571,600 left to reinvest.

The DST sale. The trust keeps the full $2 million. That “extra” $428,400—money you would have sent to the IRS— now earns its own returns.

At a 6 percent annual return, that deferred tax alone generates about $25,700 a year in new wealth. Over 10 years, that compounding “tax loan” of $428,400 can grow to over $767,000—before trustee and setup fees, which are real and can play a big part in any comparison.

You will eventually pay the tax. But you pay it on a schedule you likely set, and you earn returns on the deferred amount every year until you do.

To pull this off, though, you have to play by the IRS rules regarding your installment note.

The Installment Note: Your Terms, Your Timeline

The installment note is a contract between you and the trust. Within the rules, you negotiate the interest rate and the payment schedule.

The IRS taxes the interest as ordinary income. Each principal payment is split under the “gross profit ratio”: part comes back to you tax-free as recovery of your basis, and the rest is taxed as capital gain.

You can take interest-only payments for years to keep the capital growing, or start taking principal when you retire and your tax bracket drops.

One catch: The IRS publishes a new applicable federal rate (AFR) monthly, and your note’s interest rate when issued must meet that minimum.Undershoot the AFR and the tax code treats part of your “principal” as imputedinterest—converting capital gain into ordinary income and shrinking the benefit.

Get the structure right up front and you turn a one-day tax liability into a multi-decade income plan.

With great power comes great responsibility—and some real risk.

The Risks You Can’t Ignore

The IRS doesn’t give away these benefits for free—and it has never issued a ruling blessing the DST structure by name. The strategy rests on the installment sale statute and a line of court decisions, which means every transaction has to stand on its own facts. You need to navigate these pitfalls, as described below.

The independence test. You cannot control the trust, the trustee, or the sale proceeds. The courts have respected installment sales through genuinely independent trusts (Rushing, Roberts) and have denied deferral where the seller kept effective control of the money (Lustgarten). In the latter case, the seller was taxed on the full gain immediately under the constructive receipt doctrine.

Your trustee must be a truly independent third party—not your brother-in-law, not your CPA, and not an entity you can fire at will.

Increasing IRS scrutiny. There is no revenue ruling or regulation approving DSTs,12 and the IRS has challenged trust-based deferral arrangements under the economic substance, step transaction, and agency doctrines. A cousin of the DST strategy—the “monetized installment sale,” where a promoter loans you most of the sale price up front—made the IRS “Dirty Dozen” list and is the subject of proposed regulations that would brand it a listed transaction with mandatory disclosure.

A properly built DST is a different structure precisely because you do not get the cash up front—but the  neighborhood is being watched. Expect the transaction to be examined, and build it to survive examination.

The depreciation rules—better than you’ve heard. Here’s good news for landlords: only “recapture” income— from accelerated depreciation or from equipment and other Section 1245 property (think cost-segregation components)—must be recognized in the year of sale.

The ordinary straight-line depreciation you’ve claimed on a building creates “unrecaptured Section 1250 gain,” taxed at up to 25 percent—and that gain can be deferred and reported as the installment payments arrive.

The $5 million sting. If your outstanding installment notes exceed $5 million at year-end, the IRS charges annual interest on the deferred tax attributable to the excess principal over $5 million.17 It’s a “success tax” that erodes—but doesn’t eliminate—the benefit on very large deals. If you face this, make sure you and your advisors run the numbers.

No liquidity. The trust holds your money. You can’t reach in and pull out capital, and pledging the note as loan collateral can trigger the deferred tax. If you have an emergency and need a lump sum, the note’s payment schedule may not bend. Build your liquidity needs into your financial plan before you sell to the trust.

Your Next Move

The window for a DST closes the second you sell your asset outright—or sign a binding contract to do so. Once the trust accepts a direct payment, there is no “undo” button with the IRS.

If you’re planning a major sale of appreciated real estate or a business, start the process now:

1.  Engage a tax attorney and a CPA or enrolled agent who have structured and defended these trusts—not just a promoter who is selling them.

2.  Run the numbers three ways: direct sale, Section 1031 exchange (including the hold-until-deathstep-up scenario), and DST. Include trustee fees and state taxes.

3. Vet the trustee’s independence, track record, investment approach, and fee structure—and get it in writing.

4. Sequence the paperwork so the trust sale closes before any binding deal with your buyer exists.

The DST won’t work for every seller in every situation, and it isn’t a set-it-and-forget-it product. But for the right seller—a business owner, or a longtime landlord ready to trade tenants and toilets for a diversified income stream —it can transform a one-day tax hit into a decades-long wealth-building plan.

The IRS isn’t going anywhere—but with a well-built DST, neither is your capital.

Takeaways

• A DST defers capital gains tax when you sell appreciated real estate, a business, or private company stock—but not publicly traded securities.

• You sell the asset to an independent trust for an installment note and pay tax only as payments arrive—so the full pre-tax proceeds compound from Day One.

• For landlords, straight-line depreciation on the building is generally deferrable too; only true recapture income is taxed in year one.

• You get more flexibility than with a 1031 exchange—no deadlines, no like-kind property—but you give up the basis step-up your heirs would get if you held real estate until death.

• The IRS has never formally blessed the structure and is watching this space, so independent trusteeship, correct sequencing, and experienced counsel aren’t optional—they’re the whole ballgame.