Save on Capital Gains Tax Using the Deferred Sales Trust (DST) Strategy in 2026

When you sell an investment property, a business, or another highly appreciated asset, the capital gains tax can take a significant bite out of your proceeds. In 2026, long-term capital gains rates remain at 0%, 15%, and 20% depending on income, plus an additional 3.8% net investment income tax for high earners. For a business owner selling a company for $3 million with a $500,000 basis, a $2.5 million gain could trigger a federal tax bill approaching $600,000 or more before state taxes.

The Deferred Sales Trust (DST) is a legal, time-tested strategy that allows investors to defer those capital gains taxes on the sale of appreciated assets, including real estate, businesses, stocks, and other capital assets. When structured correctly under IRC Section 453, a DST allows a seller to defer recognizing capital gains until they actually receive installment payments from the trust rather than paying the entire tax liability in the year of sale.

What Is a Deferred Sales Trust?

A Deferred Sales Trust is a specialized form of installment sale under IRC Section 453. Rather than selling an asset directly to a buyer and receiving the full proceeds, the seller transfers the asset to a third-party trust. The trust then sells the asset to the buyer and holds the proceeds. The seller receives a secured promissory note from the trust, and the trust makes scheduled installment payments to the seller over a defined period. Because the seller has not personally received the sale proceeds, constructive receipt has not occurred, and capital gains tax is deferred until payments are actually received.

The key legal foundation is IRS Section 453, which allows taxpayers to report installment sale income only as payments are received rather than all at once in the year of sale. The DST applies this principle through a third-party trust structure that gives the seller flexibility in how and when they receive their payments, independent of the buyer's payment schedule.

How the DST Is Different from a Standard Installment Sale

In a standard installment sale, the seller agrees to receive payments directly from the buyer over time, which carries risk: if the buyer defaults, the seller loses both the asset and future payments. The DST solves this problem by inserting a third-party trustee between the seller and the buyer. The trust receives the full sale proceeds from the buyer immediately. The trust then makes payments to the seller according to the promissory note terms. The seller's payments are secured by the trust's investment portfolio rather than the buyer's ongoing payment performance, removing buyer default risk from the equation.

The trust can invest the proceeds in a diversified portfolio including REITs, bonds, annuities, securities, and other prudent investments. The trust's investment returns are what fund the ongoing installment payments to the seller, creating the potential for compounding growth on what would otherwise have been paid entirely to the IRS in year one.

2026 Capital Gains Tax Rates: Why This Strategy Matters

Under the OBBBA, signed July 4, 2025, long-term capital gains tax rates and structure were made permanent. No new capital gains tax was introduced. The rates remain at 0%, 15%, and 20% based on taxable income thresholds, which were adjusted modestly for inflation in 2026.

For 2026, the long-term capital gains rate thresholds are:

For married couples filing jointly, the 0% rate applies to taxable income up to $98,900. The 15% rate applies from $98,901 to $613,700. The 20% rate applies above $613,700. For single filers, the 0% rate applies up to $49,450, the 15% rate from $49,451 to $551,350, and the 20% rate above $551,350.

The 3.8% net investment income tax continues to apply to net investment income for individuals with modified AGI above $200,000 (single) or $250,000 (married filing jointly). This means a high earner realizing a large capital gain in a single year can face a combined federal rate of up to 23.8% on long-term gains before state taxes. In states with capital gains taxes, the effective combined rate can exceed 30%.

The DST's core benefit is deferring that entire tax liability across multiple years, keeping more money working in the trust's investment portfolio rather than being paid to the IRS up front.

Important: The OBBBA did not modify IRC Section 453. The installment sale rules that underpin the DST remain fully intact for 2026.

The Two Ways the DST Saves Money

Short-term benefit: By deferring capital gains recognition, the seller avoids paying the entire tax bill in the year of sale. If a seller would have owed $500,000 in capital gains taxes at closing, that $500,000 continues to be invested inside the trust and generating returns rather than going to the IRS immediately.

Long-term benefit: The money that would have been paid in taxes continues compounding inside the trust. Over a 10-year payment period, the after-tax outcome for the seller can be meaningfully larger than an outright sale with immediate tax payment, depending on the trust's investment performance and the seller's marginal tax rates in the years payments are received.

The math is straightforward: a dollar saved in taxes today and invested for 10 years at a conservative 6% annual return becomes $1.79. That is the compounding power of tax deferral at work.

What Assets Qualify for a Deferred Sales Trust?

The DST can be used to defer capital gains from the sale of a wide range of asset types, including:

• Investment and commercial real estate
  
  
• Privately held businesses (full or partial ownership interests)
  
  
• Business interest in an LLC or limited partnership
  
  
• Appreciated stocks, bonds, and securities
  
  
• Cryptocurrency and digital assets
  
  
• Intellectual property
  
  
• Collectibles and other capital assets

This is a key advantage over the 1031 exchange, which is limited to like-kind real estate and requires strict 45-day property identification and 180-day closing timelines. The DST has no equivalent reinvestment or timing constraints.

DST vs. 1031 Exchange: Side-by-Side

The General DST Workflow

While every DST requires qualified legal and tax counsel, the general process follows these steps:

Step 1: Evaluate feasibility. Before any sale agreement is signed, the DST structure must be analyzed. The trust must be established before closing. Once the seller receives the sale proceeds personally, the opportunity to use a DST is permanently lost.

Step 2: Establish the Charitable LLC and Investment LLC. Work with a qualified DST trustee, such as a specialized trust company, attorney, or bank, to draft the trust documents and the Deferred Sales Agreement.

Step 3: Execute the Deferred Sales Agreement. The DSA specifies the purchase price, interest rate, payment term, and structure of the promissory note the seller will receive.

Step 4: Close the sale. At closing, the seller transfers the asset to the trust. The buyer pays the full purchase price to the trust. The seller receives a secured installment note from the trust rather than cash.

Step 5: The trust invests and pays. The trustee invests the proceeds in a diversified portfolio. The trust makes installment payments to the seller per the note terms. Capital gains taxes are recognized and paid only as payments are received.

Step 6: Estate planning integration. With proper planning, the principal inside the installment note can be structured so that a significant portion passes to the seller's legal heirs through the seller's estate, potentially accomplishing an estate tax freeze.

The Costs of a Deferred Sales Trust

The DST is not a free strategy. Typical fees include:

• Setup fee of approximately 1.5% of the first $1 million of original principal, and approximately 1.25% on amounts above $1 million
  
  
• An ongoing annual trustee fee of approximately 0.5% of the portfolio value
  
  
• An ongoing investment management fee from the financial advisor designated by the trustee, which typically ranges from 0.25% to 1.5% annually depending on portfolio size and complexity

These costs must be factored into the ROI analysis presented to clients. For a $2 million gain with a 20% federal rate plus 3.8% NIIT, the deferred tax liability is approximately $476,000. On a transaction of that size, setup fees in the range of $25,000 to $30,000 represent less than 6% of the deferred tax benefit, which for most high-net-worth clients represents a compelling trade-off.

Important Risks to Communicate Clearly

The DST is a powerful strategy, but accountants have a professional obligation to present the full picture.

No explicit IRS ruling: The DST structure is not formally endorsed by the IRS through a specific public ruling. It is based on the installment sale rules under Section 453, but the "Deferred Sales Trust" terminology does not appear in the Internal Revenue Code. Proper documentation and a qualified trustee are essential to withstand potential IRS scrutiny.

Irrevocability: Once the asset is transferred to the trust, the structure cannot be unwound. The seller receives installment payments rather than a lump sum, and full liquidity is not available.

Trust investment risk: The seller's ongoing payment stream depends on the trust's investment performance. A poorly performing portfolio could affect the trust's ability to meet its payment obligations, though a well-structured trust with conservative investments significantly reduces this risk.

Setup timing is critical: The trust must be established and the asset transferred before the closing. If the seller has already constructively received the proceeds, the DST opportunity is permanently lost.

Depreciation recapture timing: For real estate, depreciation recapture income (taxed as ordinary income, not capital gains) is recognized in the year of sale regardless of the installment structure. Only the capital gain portion benefits from deferral.

From Jackie's Practice: When the Seller Becomes the Client

A note from Dr. Jackie Meyer, founder of TaxPlanIQ

I have sat on both sides of this conversation. As an accountant, I have helped clients navigate the tax consequences of business exits. And as a business owner, I have navigated the same questions myself.

In The Balanced Millionaire, I share the story of how I ultimately sold my own firm. I had been building it for years, shifting from a compliance-heavy practice to a fully advisory-focused model, repricing clients based on value, systematizing everything. I had built a seven-figure practice with strong recurring revenue, documented processes, and a team that could operate without me being on-site every day. That was the version of the firm a buyer would actually pay a premium for.

When the time came to sell, I was able to close at 1.5 times annual recurring revenue, a meaningful premium over the typical one-times valuation for owner-dependent practices. The buyer was paying for a machine, not just a client list.

What I did not always have in my earlier years was a proactive exit tax strategy built into my own planning. That is something I now think about differently. The question of what happens to the tax liability when you sell a business should not come up at the closing table. It should be something an accountant raises two to five years before a client is even thinking about exiting, so the right structure is in place when the moment arrives.

The Deferred Sales Trust is one of the most powerful tools for that conversation. I had a real estate investor client with multiple properties across several states, working with a compliance-only accountant who filed returns but never planned proactively. When I reviewed his situation, I found not just depreciation and cost segregation opportunities but also the beginning of an exit strategy framework that included thinking ahead about how he would eventually unwind those positions without triggering a tax event that wiped out years of gains in a single year.

I put together a strategy that would save him more than $75,000 annually. I charged $25,000 for the advisory engagement, giving him a 200% ROI before even modeling the exit-year savings.

That is the opportunity that capital gains planning represents. A client planning to sell a business or investment property with $1 million or more in embedded gain is looking at a six-figure tax event. The accountant who raises that conversation early, presents the options clearly, and builds a plan around it becomes indispensable. The accountant who waits until after closing to deliver the news has lost the advisory opportunity entirely.

How TaxPlanIQ Can Help With DST

If you are working with a client who is interested in setting up a Deferred Sales Trust, TaxPlanIQ can help. Our software provides an elaborate DST strategy framework to help you and your client navigate the rules and regulations. We have also partnered with Capital Gains Tax Solutions, an industry-leading Deferred Sales Trust Investment Trustee Service that helps high-net-worth individuals and businesses with complex financial assets minimize their capital gains tax exposure. This partnership gives you access to their extensive knowledge and experience in setting up DSTs.

Get a demo of TaxPlanIQ and see how it helps you and your clients create a clear Deferred Sales Trust strategy and a comprehensive wealth plan.

Frequently Asked Questions

Q1: How is a Deferred Sales Trust different from a Delaware Statutory Trust?

These are two completely different structures that happen to share the same abbreviation. A Delaware Statutory Trust (DST) is a real estate investment vehicle used in 1031 exchanges. A Deferred Sales Trust (DST) is an installment sale arrangement under IRC Section 453 used to defer capital gains on virtually any appreciated asset. They are not interchangeable. When reviewing any DST proposal with a client, confirm which structure is being discussed.

Q2: Can a Deferred Sales Trust be used for the sale of a business?

Yes. The DST can be structured for the sale of privately held business interests, partial interest sales, and full company exits. It is particularly effective for business owners who have built significant equity over many years and face a concentrated, high-gain event upon sale. The minimum threshold is generally $1 million in net proceeds and $1 million in capital gains. Sellers should work with a DST trustee experienced in business transactions, as valuation and deal structure add complexity compared to real estate transactions.

Q3: Does the DST need to be set up before the sale closes?

Yes, and this is non-negotiable. The trust must be established and the asset transferred to the trust before the sale closes and before the seller constructively receives any proceeds. Once the seller personally receives the sale proceeds, the DST opportunity is permanently closed. This is why accountants who have clients contemplating large asset sales should raise the DST conversation well before the transaction is finalized.

Q4: Does the OBBBA affect how a DST works in 2026?

No. The OBBBA did not modify IRC Section 453, which is the installment sale provision that underpins the DST. Long-term capital gains rates also remain unchanged at 0%, 15%, and 20%. The 3.8% net investment income tax continues to apply for high earners. The DST works exactly as it has previously, and if anything, the permanent extension of current rates under the OBBBA gives clients more certainty in modeling multi-year installment payment tax liability.