What Is a Deferred Sales Trust?

A deferred sales trust (DST) allows a home's seller to defer capital gains taxes on a property for a predetermined period. The profit on the property is placed in trust, and the capital gains taxed is paid out only after a certain period has lapsed. This period is decided upon before the trust is opened according to IRS rules.

DST vs. 1031 Exchange

Often, this option is used in lieu of a 1031 exchange. In a 1031 exchange, the profit off one piece of property is directly applied toward the purchase of a new property. Since the home seller did not net a gain in the given fiscal year, the tax can be deferred until the capital gains is actually recognized with the sale of the new property in the future. Though a 1031 is more popular than a DST, it is not always the best solution. If a home seller is not purchasing a new property immediately, a DST will still permit tax deferment, while a 1031 option would not. In fact, a DST is often used in cases where a 1031 exchange fails to materialize but the seller still wants to defer taxes.