Deferred Sales Trust (DST) — Complete Guide

Executive Summary

A Deferred Sales Trust (DST) is a marketed strategy that tries to defer capital gains tax on the sale of an appreciated asset. Instead of selling directly to a buyer, the owner sells the asset to a trust in exchange for an installment note under IRC §453. The trust then immediately resells the asset to the real buyer for cash, invests the cash, and pays the owner over time. The owner reports gain only as note payments are received.

Important Caveat: No statute, Treasury regulation, revenue ruling or other published IRS guidance approves the DST structure, and there is no safe harbor for it. It relies on the general installment-sale rules plus the argument that the trust is a genuine, independent buyer. If the IRS successfully argues that the trust was really the seller's agent, a conduit, or part of a single pre-arranged sale, the entire gain can be taxed in the year of sale, with interest and possible penalties. Anyone considering a DST should have it reviewed by independent tax counsel who is not paid by or affiliated with the promoter.

(Note: "DST" is also widely used for Delaware Statutory Trusts, which are a different, IRS-recognized vehicle for fractional real estate ownership in 1031 exchanges. This guide is about Deferred Sales Trusts only.)

What Is a Deferred Sales Trust?

A DST is essentially a two-step sale through an intermediary trust. The owner sells the asset to a newly formed irrevocable trust for a promissory note. The trust, which takes a cost basis equal to the note's value, resells the asset to the end buyer for about the same price, so it reports little or no gain. The owner then reports gain under the installment method as principal is paid on the note.

A Marketed Strategy, Not a Code Section

The name "Deferred Sales Trust" is associated with Estate Planning Team, Inc., which has claimed trademark rights in the term. It markets the structure through a network of affiliated advisors who, according to a 2019 Forbes report, share in set-up fees and ongoing money-management fees. That business model does not make the strategy invalid, but it does mean:

• Much of the information online is promotional and written by people who earn fees if you proceed
• Claims of past audit success are not IRS approval. The IRS does not publish its views on individual audits.
• You should ask, in writing, for every fee (set-up, trustee, investment management, legal) and every party who will be paid
• Your review should come from an attorney or CPA with no financial stake in whether you go ahead

DSTs vs. Monetized Installment Sales

The IRS has targeted a closely related arrangement, the monetized installment sale. In August 2023 (IR-2023-139), Treasury and the IRS proposed regulations (REG-109348-22) that would make monetized installment sales, and substantially similar transactions, listed transactions with mandatory disclosure and penalties. The IRS also put them on its 2023 "Dirty Dozen" list. In that pattern, an intermediary buys the asset for an installment note and immediately resells it, and the seller gets a loan approximately equal to the sale proceeds, secured directly or indirectly by those proceeds. The final regulations were scheduled for May 2026 on the federal regulatory agenda, but we could not confirm that they have been issued as of this update, so check their current status.

A DST that lets the seller borrow against the note, or that routes the proceeds back to the seller through loans, is likely to be treated like a monetized installment sale.

Legal Structure & Parties

Seller/Note Holder

The person who owns the appreciated asset. The seller:

• Sells the asset to the trust in exchange for an installment note
• Reports gain as principal payments are received, if the installment method is respected
• Must not be the trustee or control the trust, its investments or the timing of payments
• Bears the risk that the trust's investments underperform, because the trust's obligation is typically limited to the trust's assets

Trustee

The structure depends on the trust being a real, independent buyer:

• The trustee should not be the seller, a family member, an employee, or anyone else under the seller's control
• The trustee must actually exercise independent judgment over the trust's investments and administration
• A trustee chosen, paid or controlled by the promoter raises its own conflict-of-interest questions

Buyer

The third party who ultimately buys the asset from the trust and pays cash. In practice the buyer is often already lined up before the trust is formed. That is the fact pattern that invites a step-transaction challenge (see below).

Installment Note

The promissory note issued by the trust to the seller. The note:

• Has a stated term, often long (10 years or more), and sometimes calls for interest-only payments with a balloon payment of principal at the end
• Must carry adequate stated interest, generally at least the Applicable Federal Rate (AFR) for its term under the imputed-interest rules (IRC §1274, and §483 for some sales), or part of the principal is recharacterized as interest
• Must not be payable on demand or readily tradable, or receiving it counts as payment (IRC §453(f)(4))
• Must be a genuine debt that the trust is expected and able to pay

How It Is Supposed to Work

Phase 1: Trust Formation and Asset Transfer

1. A trust is formed with a trustee unrelated to the seller
2. The seller sells the asset to the trust for an installment note, before the seller is legally bound to sell to the end buyer
3. The note terms are documented: interest at or above the AFR, payment schedule and maturity

Phase 2: Resale to the Buyer

1. The trust sells the asset to the third-party buyer
2. The trust receives the cash proceeds
3. Because the trust's basis is what it "paid" (the note amount), it reports little or no gain on the resale

Phase 3: Investment and Installment Payments

1. The trustee invests the proceeds
2. The trust makes payments to the seller under the note
3. For the seller, each payment is part interest (ordinary income) and part principal. The principal portion is split between tax-free return of basis and taxable gain using the gross profit ratio.

Phase 4: Claimed Tax Deferral

1. If the installment method is respected, gain is recognized as principal is paid, rather than all at once
2. The deferral is only as good as the structure. If the IRS succeeds in collapsing the transaction, the gain is taxed in the year of the original sale.

Tax Rules That Apply

IRC §453 — Installment Sale Rules

IRC §453 lets a seller report gain as payments come in when at least one payment is received after the close of the year of sale. Key points:

• §453(a), (c): Income is recognized as payments are received, in proportion to the gross profit ratio
• §453(b): An installment sale is a disposition where at least one payment is received after the close of the taxable year. Dealer dispositions and inventory are excluded.
• §453(d): A taxpayer may elect out and report all gain in the year of sale
• §453(f)(4): A demand note or readily tradable debt counts as a payment
• §453(k): The installment method is not available for sales of publicly traded stock or securities

Capital Gains Recognition

Each principal payment includes a proportional amount of gain:

Simplified example: a $5 million asset with a $1 million basis and no depreciation, sold for a 20-year note with level principal payments:

• Total gain: $4 million; gross profit ratio: $4M ÷ $5M = 80%
• Annual principal: $250,000, of which $200,000 is taxable gain
• At a 20% capital gains rate plus the 3.8% net investment income tax (if it applies): about $47,600 a year, versus about $952,000 if all gain were taxed in the year of sale
• This ignores state tax, fees, interest income on the note, investment performance and the risk the structure is disallowed. Many DST notes are interest-only with a balloon, which pushes most of the gain to the end. Above $5 million of face amount, the §453A interest charge would also apply.

Interest on the Note (IRC §§1274, 483)

Seller-financed notes must carry adequate stated interest, measured against the AFR for the note's term:

• Short-term AFR: terms of 3 years or less
• Mid-term AFR: over 3 and up to 9 years
• Long-term AFR: over 9 years

Interest the seller receives is taxed at ordinary income rates and may also be subject to the 3.8% net investment income tax. AFRs change monthly, so check the current rate.

IRC §453A — Interest Charge and Pledge Rule

Two parts of §453A matter a great deal for large DSTs:

• Interest charge on deferred tax: For installment obligations from sales over $150,000, if the face amount of such obligations that arose during the year and are still outstanding at year-end exceeds $5 million, the seller owes an annual interest charge on part of the deferred tax liability, computed at the IRS underpayment rate. This can substantially reduce the benefit of deferral on large sales.
• Pledge rule (§453A(d)): If the seller borrows and the loan is secured by the installment obligation, the net loan proceeds are treated as a payment on the note, which triggers gain. This is the rule the IRS has relied on against monetized installment sales.

Depreciation Recapture Is Not Deferred

Under IRC §453(i), "recapture income" (ordinary income under §1245, or under §1250 for additional depreciation) must be reported in the year of sale, even if no cash is received that year. Only the gain above recapture is eligible for installment reporting. For equipment-heavy businesses, or real estate with accelerated or bonus depreciation, the seller can owe significant tax in year one with no cash from the sale to pay it. Separately, "unrecaptured §1250 gain" on real estate (taxed at up to 25%) is reported under the installment method but is taken into account first, out of the earliest payments (Treas. Reg. §1.453-12).

Related-Party Rules (§453(e), (g))

• §453(e) second-disposition rule: If you sell to a related person on the installment method and that person resells within 2 years, the amount the related person realizes is treated as received by you, which ends the deferral. In a DST the trust resells almost immediately, so the trust must not be a related person. "Related person" is defined by reference to the attribution rules of §318 and the relationships in §267(b) (§453(f)(1)), which can include trusts and their beneficiaries and fiduciaries. A DST whose beneficiaries are the seller's family needs careful analysis.
• §453(g): The installment method is generally unavailable for sales of depreciable property to a related person, unless tax avoidance was not a principal purpose.

Dealer and Ineligible Property

• Dealer dispositions (for example, lots or homes held for sale to customers) and inventory cannot use the installment method (§453(b)(2), (l))
• Publicly traded stock and securities cannot use the installment method (§453(k)), so DSTs generally do not work for selling listed stock
• A principal residence usually benefits from the §121 exclusion of up to $250,000 of gain ($500,000 for many married couples) without any special structure

Comparing Alternatives

A DST is one of several ways people try to manage a large capital gain. Each has trade-offs. None is right for everyone.

Opportunity zones after OBBBA: The One Big Beautiful Bill Act (signed July 4, 2025) made the opportunity zone program permanent with new rules for gains invested in a Qualified Opportunity Fund after December 31, 2026. These include a rolling 5-year deferral period, a 10% basis increase after 5 years (30% for qualified rural funds), and continued exclusion of post-investment appreciation for long holds, with a 30-year limit. New zone designations take effect January 1, 2027. Under the old rules, all deferred gains become taxable on December 31, 2026, so a 2026 investment under the old program offers little deferral. Timing around this changeover is technical, so get advice before relying on it.

Where a DST Is Usually Considered

Promoters usually pitch DSTs where a 1031 exchange is not available or did not work:

1. Sale of a business: 1031 has applied only to real property since 2018, so goodwill and equipment do not qualify (but recapture on equipment is taxed in year one anyway)
2. Failed 1031 exchange: Some sellers try to use a DST when the 45/180-day deadlines cannot be met. How this interacts with qualified-intermediary rules and the timing of the original sale is technical and must be reviewed by your own tax counsel before closing.
3. Wanting to diversify out of real estate without another property purchase
4. Privately held assets, such as closely held stock or cryptocurrency (which 1031 does not cover). Crypto's tax treatment raises additional questions.

In each case, compare the DST with a plain installment sale to the buyer, a CRT, an opportunity-fund investment, or simply paying the tax, after counting all fees and risks.

Asset-by-Asset Considerations

IRS Scrutiny & Legal Risk

IRS Enforcement Posture

• No approval: There is no published IRS ruling, regulation or safe harbor approving the DST structure
• Monetized installment sales: Proposed regulations (REG-109348-22, August 2023) would make these and "substantially similar" transactions listed transactions. Advisors should check whether a particular DST design could be "substantially similar," especially if any loan to the seller is involved.
• Dirty Dozen: Monetized installment sales appeared on the IRS's 2023 "Dirty Dozen" list
• Economic substance: Transactions without economic substance can be disregarded under the common-law doctrine (Gregory v. Helvering, 293 U.S. 465 (1935)) and the codified doctrine in IRC §7701(o)

Key Legal Doctrines

Questions for Independent Tax Counsel

1. Is there any published authority supporting this exact design, and what are the strongest arguments the IRS would make against it?
2. Was the asset sold to the trust before any binding agreement with the buyer? Could the step-transaction doctrine apply?
3. Is the trust or any trustee a "related person" under §453(f)(1)? Who are the trust's beneficiaries?
4. How much depreciation recapture will be taxed in the year of sale, and how will I pay it?
5. Will the §453A interest charge apply? Is any loan or credit line involved that the pledge rule could reach?
6. Does the transaction need to be disclosed on Form 8886 now, or would it if the proposed monetized-installment-sale regulations are finalized?
7. What are all the fees, who receives them, and what happens if the trust's investments lose money?
8. Will you give a written opinion, and am I relying on anyone who is paid by the promoter?

The Independent Trustee Requirement

Why Independence Matters

If the seller controls the trustee, directly or indirectly, the IRS can argue the trust is just the seller's agent. In that case:

• The seller is treated as having sold the asset for cash
• The entire gain (above basis) is taxed in the year of sale
• Interest, and potentially accuracy-related penalties, apply

Independence is necessary but not sufficient. An independent trustee does not cure step-transaction, related-party or pledge-rule problems.

Who Is Independent?

• ✅ Unaffiliated corporate trust company (a bank trust department or independent trust company)
• ✅ Unrelated professional fiduciary with no other relationship to the seller
• ❌ Seller's spouse or family member
• ❌ Seller's business partner, employee or adviser
• ❌ Entity controlled by the seller (directly or through attribution under IRC §§267/318)
• ⚠️ Promoter-affiliated trustee: not related to you, but conflicted, because it is paid when the structure is sold

Investment of Trust Proceeds

After the resale, the trust holds the cash and the trustee invests it.

Investment and Credit Risk

• You become the trust's creditor. Your note is typically payable only from trust assets. If the investments lose money, you may not be paid in full, and you have little recourse.
• Liquidity: The trust must keep enough liquidity to make note payments and pay fees
• Fiduciary duties: The trustee owes duties under state law and the trust instrument, but those duties run to the trust's beneficiaries as well as to you as noteholder
• Prudence: Concentrated, illiquid or speculative investments increase the risk that the note is not paid

Fees and Conflicts

• Expect a set-up fee and ongoing trustee and investment-management fees. Get them in writing, compare them with the tax actually deferred, and ask who shares in them.
• Ask whether the investment adviser is chosen by, or affiliated with, the promoter
• Investing in the seller's own business or deals, or in investments the seller directs, undercuts the trust's independence

Formation Requirements

Essential Steps

1. Engage independent tax counsel: an attorney or CPA experienced in installment sales who is not affiliated with or paid by the promoter
2. Compare alternatives (paying the tax, a plain installment sale, a 1031 exchange, a CRT, an opportunity fund) on an after-fee, after-risk basis
3. If you proceed, get a written analysis of the specific transaction, including its weaknesses
4. Form the trust with a genuinely independent trustee
5. Execute the installment note with adequate stated interest (at least the applicable AFR), a fixed schedule and maturity, and no demand features
6. Sell to the trust before any binding contract with the end buyer, with documents showing the trust as the seller in the resale
7. Report correctly: the seller reports the sale on Form 6252 (installment sale income) and Form 8949/Schedule D, the trust files Form 1041, and Form 8886 is filed if required

Documentation Requirements

• Trust agreement
• Installment promissory note (with AFR-compliant terms) and any security agreement
• Qualified appraisal or other support for fair market value
• Written tax analysis or opinion from independent counsel
• Purchase agreement (seller to trust) and resale documents (trust to buyer), with dates
• Trust investment policy statement
• Annual trustee accountings and records of each note payment

Estate Planning Integration

Death of the Note Holder (No Step-Up)

If the seller dies before the note is paid off:

• The unpaid note is included in the seller's gross estate at its fair market value
• The unreported gain in the note is income in respect of a decedent (IRD) under IRC §691(a)(4), and IRD does not receive a basis step-up (IRC §1014(c))
• The heirs who collect the remaining payments still report the deferred gain as they receive it, just as the seller would have. They may be entitled to an income tax deduction for estate tax paid on the IRD (§691(c)).

Correction to a common claim: Some promotional materials suggest that a DST note gets a stepped-up basis at death, "eliminating" the deferred gain. Under §691(a)(4) and §1014(c), that is generally not the case for installment obligations. By contrast, property received in a 1031 exchange and held until death generally does receive a step-up under §1014.

Integration with Other Trust Strategies

• Annual gifts: After-tax note payments can fund gifts to family or trusts using the $19,000 (2026) annual exclusion per recipient
• ILIT premiums: Payments can help fund premiums for life insurance held in an ILIT
• Estate tax: With a $15 million (2026) per-person basic exclusion, most families' main concern is income tax, not estate tax. The unpaid note remains part of the estate.
• Charitable goals: If charity is already a goal, a CRT funded before the sale is a statute-based alternative to compare

Sample Provision Language

⚠️ DISCLAIMER: The following language is provided for educational and illustrative purposes only. It does not make any transaction qualify for installment-sale treatment.

Installment Note Terms

Trustee Independence Clause

Common Pitfalls & Compliance

1. Constructive Receipt and Seller Control

The seller has access to, or control over, the sale proceeds, the trustee, or the timing of payments. Solution: No seller control, no demand rights, and no side agreements.

2. Inadequate Trustee Independence

Using a trustee who is related to, employed by or controlled by the seller. Solution: Use a genuinely independent trustee, and understand any promoter affiliation.

3. Sham and Step-Transaction Challenges

Forming the trust after the buyer's contract is signed, or using a trust that exists only to flip the asset. Solution: Have independent counsel review the timing and substance before any binding sale agreement.

4. Below-AFR Interest Rate

Setting the note's interest below the applicable AFR. Solution: Use at least the AFR for the note's term and document the rate source.

5. Borrowing Against the Note

Taking a loan secured by the note or the trust's assets. Under §453A(d) the loan proceeds are treated as a payment, and the arrangement starts to look like a monetized installment sale. Solution: Do not borrow against the note. Ask your counsel whether Form 8886 disclosure is required.

6. Promoter Reliance Without Independent Counsel

Relying only on the promoter's materials or the promoter's chosen attorney. Solution: Get a written review from a tax attorney or CPA who has no financial interest in the transaction.

How Trust Wizard Helps

Trust Wizard does not evaluate whether a DST will work for you and does not endorse the strategy. Trust Wizard is an organizer and educational tool. It is not a law firm, does not give legal or tax advice, and does not by itself create a valid trust. Your information stays on your device.

• Document Wizard: Start from fill-in drafting templates — a Deferred Sales Trust installment agreement and an Installment Promissory Note — as starting drafts for your attorney.
• Document vault: Scan and store the signed note, purchase and resale documents, appraisal and trustee accountings on your device.
• Enlightenment Hub: Read the Deferred Sales Trust education module before you meet your attorney.

The app does not track note payments. Every template is a starting draft and must be reviewed by a licensed attorney in your state, and by independent tax counsel, before anyone signs it. See all features.

Sources & Further Reading

• IRC §453: Installment method, including §453(e) related-party resales and §453(i) recapture (Cornell LII)
• IRC §453A: Interest charge over $5 million and the pledge rule (Cornell LII)
• IRC §691: Income in respect of a decedent, including installment obligations (Cornell LII)
• IRC §1274: Imputed interest and the applicable federal rate (Cornell LII)
• IRS IR-2023-139: Proposed regulations identifying monetized installment sales as listed transactions
• Unified Agenda: Status of the monetized installment sale listed-transaction rule (RIN 1545-BQ69)
• IRC §1031: Like-kind exchanges of real property (Cornell LII)
• IRC §664: Charitable remainder trusts (Cornell LII)
• Thomson Reuters: Tax experts on OBBBA changes to opportunity zones
• Forbes (Peter J. Reilly): Deferred Sales Trust, a tax plan or a product?