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Deferred Sales Trust

A Deferred Sales Trust (DST) is a type of financial arrangement used in real estate transactions, particularly as an alternative to a 1031 exchange. In a traditional 1031 exchange, also known as a like-kind exchange, an investor can defer capital gains taxes on the sale of an investment property by reinvesting the proceeds into another property of like kind within a certain timeframe.

A Deferred Sales Trust, on the other hand, is a strategy used when an investor wants to sell a property and defer taxes, but either cannot find a suitable replacement property in time to meet the 1031 exchange deadlines or wants more flexibility than a 1031 exchange allows.

Here’s how a DST generally works:

  1. The property owner sells their investment property to a trust before the actual sale to a final buyer.
  2. The trust sells the property to the final buyer, and the sales proceeds are received by the trust instead of the seller.
  3. The trust then pays the seller in installments over a period of time, providing a stream of income. The seller is only taxed on these installments as they receive them, thus deferring the bulk of capital gains taxes until a later date.
  4. The trust can invest the money from the sale in various securities and other investments, not just real estate, offering the seller more diversified investment opportunities.

The Deferred Sales Trust can be a complex financial tool involving various legal and tax implications, so it’s often set up with the help of financial advisors, tax professionals, and attorneys who specialize in such transactions. It’s not endorsed by the IRS as a tax deferral strategy in the same way as a 1031 exchange, so it carries some level of scrutiny and risk. Investors should consult with professionals to understand all the risks and benefits before proceeding with a DST.