DST vs Tax Deferral Strategies: Comprehensive Comparison Guide

Selecting the optimal tax deferral strategy can dramatically impact your long-term financial outcomes when selling appreciated assets. The DST vs tax deferral strategies comparison requires careful analysis of each option’s benefits, limitations, requirements, and suitability for different situations. This comprehensive guide examines how Deferred Sales Trusts stack up against other major tax deferral mechanisms to help you make informed decisions about preserving wealth and minimizing tax burdens.

Understanding the distinctions in the DST vs tax deferral strategies landscape is essential for investors, business owners, and property holders seeking to maximize after-tax returns. Each approach offers unique advantages for specific scenarios, with important differences in flexibility, complexity, time horizons, and investment options.

Table of Contents

• The Tax Deferral Landscape: An Overview
• Deferred Sales Trust: The Flexible Alternative
• 1031 Exchange vs DST: Real Estate-Focused Comparison
• Qualified Opportunity Zones vs DST: Development-Oriented Deferral
• Delaware Statutory Trust vs Deferred Sales Trust: Clearing the Confusion
• Installment Sales vs DST: Basic vs Enhanced Structure
• Charitable Remainder Trusts vs DST: Philanthropy and Tax Planning
• UPREIT vs DST: The Real Estate Investment Trust Alternative
• Monetized Installment Sales vs DST: Contrasting Approaches
• Self-Directed IRAs vs DST: Retirement-Focused Comparison
• Strategic Decision Framework: Choosing the Right Strategy
• Case Studies: Tax Deferral Strategy Selection
• Combining Strategies: Hybrid Approaches
• Tax Law Considerations and Future Outlook
• FAQs: DST vs Tax Deferral Strategies

The Tax Deferral Landscape: An Overview

Before diving into specific DST vs tax deferral strategies comparisons, it’s helpful to understand the broader tax deferral landscape:

The Purpose of Tax Deferral

Tax deferral strategies serve several important financial objectives:

• Postponing capital gains tax payments to maintain greater investment principal
• Allowing continued growth of pre-tax dollars over time
• Creating opportunities for more efficient tax planning
• Potentially achieving reduced tax rates in the future
• Facilitating smoother transitions between investment assets

Major Categories of Tax Deferral

The DST vs tax deferral strategies comparison spans several categories:

• Like-kind exchange strategies – Deferring gain by exchanging one qualifying property for another
• Installment sale approaches – Spreading gain recognition over multiple tax years
• Qualified opportunity investments – Incentivized investments in designated development zones
• Charitable planning techniques – Combining philanthropy with tax advantages
• Retirement-focused approaches – Using qualified accounts for tax-advantaged growth
• Specialized trust structures – Creating tax-advantaged vehicles for specific purposes

Each category represents a different approach to the fundamental goal of tax deferral, with unique requirements, benefits, and limitations.

“The ideal tax deferral strategy balances immediate tax savings with long-term flexibility, investment control, and exit planning considerations.” — Journal of Financial Planning

Understanding these distinctions provides the foundation for our detailed DST vs tax deferral strategies analysis.

Deferred Sales Trust: The Flexible Alternative

Before comparing the DST to other strategies, let’s establish a clear understanding of the Deferred Sales Trust structure:

DST Fundamentals

A Deferred Sales Trust operates through a third-party trust arrangement:

• The seller transfers appreciated assets to a trust before a sale
• The trust sells the assets to the buyer
• The trust invests the proceeds according to a predetermined investment policy
• The seller receives installment payments over time according to a note
• Capital gains taxes are paid proportionally as payments are received

Key DST Advantages

Several features distinguish the DST in the DST vs tax deferral strategies comparison:

• Asset flexibility – Works with multiple asset types (businesses, real estate, securities, etc.)
• Investment diversification – Proceeds can be invested across various asset classes
• Customizable payments – Installment schedules can be tailored to specific income needs
• No geographic limitations – Unlike some strategies, not restricted to specific locations
• No strict timeline requirements – More flexible timeframes than many alternatives
• Estate planning integration – Can be coordinated with broader legacy planning

DST Limitations and Considerations

Important considerations when evaluating the DST vs tax deferral strategies landscape:

• Complexity – Requires proper legal structuring and ongoing administration
• Third-party trustee – Necessitates working with a qualified, independent trustee
• Setup costs – Typically higher initial costs than simpler strategies
• IRS scrutiny – Requires careful implementation to ensure compliance
• Professional guidance – Generally needs coordinated legal, tax, and financial planning expertise

This overview of the DST provides context for comparing it to other tax deferral approaches.

1031 Exchange vs DST: Real Estate-Focused Comparison

One of the most common DST vs tax deferral strategies comparisons involves the 1031 exchange, given its popularity among real estate investors:

1031 Exchange Basics

Section 1031 of the Internal Revenue Code allows for tax-deferred exchanges of like-kind property:

• Defers capital gains tax on real estate when exchanging for “like-kind” property
• Requires identification of replacement property within 45 days
• Requires closing on replacement property within 180 days
• Must use a qualified intermediary to hold proceeds
• Replacement property must be of equal or greater value to defer full gain

Key Differences: DST vs 1031 Exchange

The DST vs tax deferral strategies analysis reveals significant distinctions:

Optimal Use Cases

The DST vs tax deferral strategies comparison suggests these optimal applications:

1031 Exchange Ideal For:

• Real estate investors wanting to remain in real estate
• Situations where suitable replacement properties are readily available
• Investors seeking to consolidate or upgrade properties
• Those comfortable with continued property management responsibilities
• Scenarios where the strict timeline can be confidently met

DST Ideal For:

• Sellers wanting diversification beyond real estate
• Situations where identifying replacement properties is challenging
• Those seeking to retire from active property management
• Scenarios needing customized income streams
• Cases where the 45/180-day timeline is problematic

This DST vs tax deferral strategies comparison highlights how these two approaches serve different investor needs, often complementing rather than competing with each other.

Qualified Opportunity Zones vs DST: Development-Oriented Deferral

Another important DST vs tax deferral strategies comparison involves Qualified Opportunity Zones (QOZs), a newer tax incentive program:

Qualified Opportunity Zone Basics

Created by the Tax Cuts and Jobs Act of 2017, QOZs incentivize investment in designated economically distressed communities:

• Allows deferral of capital gains invested in Qualified Opportunity Funds (QOFs)
• Originally deferred gains until December 31, 2026 (regardless of investment date)
• Provided 10% basis step-up after 5 years (if invested by December 31, 2021)
• Additional 5% basis step-up after 7 years (if invested by December 31, 2019)
• Elimination of gains on the QOZ investment itself if held for 10+ years
• Requires substantial improvement of acquired property in most cases

Key Differences: DST vs Qualified Opportunity Zones

The DST vs tax deferral strategies examination shows important contrasts:

Optimal Use Cases

The DST vs tax deferral strategies analysis suggests these best applications:

Qualified Opportunity Zones Ideal For:

• Investors with development expertise or partners
• Those comfortable with higher-risk, potentially higher-reward investments
• Investors seeking some tax forgiveness in addition to deferral
• Those with an interest in community economic development
• Long-term investors who can meet the 10-year holding period

DST Ideal For:

• Investors seeking geographic flexibility
• Those prioritizing investment diversification
• Investors needing customized payment schedules
• Those uncomfortable with development risks
• Situations requiring more control over investment selection

This DST vs tax deferral strategies comparison demonstrates how QOZs serve a specific investor profile with different priorities than typical DST candidates.

Delaware Statutory Trust vs Deferred Sales Trust: Clearing the Confusion

The similarity in acronyms often creates confusion in the DST vs tax deferral strategies discussion:

Delaware Statutory Trust Basics

A Delaware Statutory Trust (also abbreviated DST) is a legal entity used in real estate investments:

• Allows fractional ownership of institutional-quality real estate
• Qualifies as “like-kind” property for 1031 exchanges
• Offers passive ownership without management responsibilities
• Typically provides regular income distributions
• Enables access to larger properties than individuals could acquire alone
• Generally requires accredited investor status

Key Differences: Deferred Sales Trust vs Delaware Statutory Trust

Despite sharing an acronym, these are entirely different in the DST vs tax deferral strategies landscape:

Complementary Strategies

Interestingly, in the DST vs tax deferral strategies context, these two DSTs can sometimes work together:

• A Delaware Statutory Trust can be a qualifying replacement property in a 1031 exchange
• Later, when selling Delaware Statutory Trust interests, a Deferred Sales Trust could be used if another 1031 exchange isn’t desired
• This creates a potential transition from active to completely passive real estate ownership

This clarification helps investors understand these distinct strategies that coincidentally share the same acronym.

Installment Sales vs DST: Basic vs Enhanced Structure

The fundamental DST vs tax deferral strategies comparison must include traditional installment sales, as the DST builds upon this foundation:

Traditional Installment Sale Basics

A basic installment sale involves selling property and receiving payments over time:

• Governed by Section 453 of the Internal Revenue Code
• Gain is recognized proportionally as payments are received
• Seller typically takes back a promissory note from buyer
• Often secured by the sold property
• Interest on the note is taxable as ordinary income
• Principal payments include a proportionate share of gain

Key Differences: DST vs Traditional Installment Sale

The DST vs tax deferral strategies analysis reveals how the DST enhances the basic structure:

Optimal Use Cases

The DST vs tax deferral strategies examination suggests these ideal applications:

Traditional Installment Sale Ideal For:

• Smaller transactions with trusted buyers
• Situations where simplicity is valued
• Sellers comfortable with buyer credit risk
• Transactions with lower complexity requirements
• Cases where professional fees are a significant concern

DST Ideal For:

• Larger transactions where buyer default risk is concerning
• Situations requiring investment diversification
• Sellers seeking professional asset management
• Transactions needing more sophisticated estate planning
• Cases where maximum flexibility is desired

This comparison shows how the DST builds upon and enhances the traditional installment sale structure for more complex needs.

Charitable Remainder Trusts vs DST: Philanthropy and Tax Planning

An important DST vs tax deferral strategies comparison involves Charitable Remainder Trusts (CRTs), which combine tax deferral with philanthropy:

Charitable Remainder Trust Basics

A CRT is an irrevocable trust that provides income to beneficiaries while ultimately benefiting charity:

• Assets transferred to trust generate immediate partial tax deduction
• Trust sells assets tax-free and reinvests proceeds
• Income beneficiaries receive payments for life or a term of years
• Remainder goes to charity upon trust termination
• Two main types: Charitable Remainder Annuity Trust (CRAT) and Charitable Remainder Unitrust (CRUT)
• Required minimum 10% remainder value to charity

Key Differences: DST vs Charitable Remainder Trust

The DST vs tax deferral strategies evaluation shows significant distinctions:

Optimal Use Cases

The DST vs tax deferral strategies assessment indicates these best applications:

Charitable Remainder Trust Ideal For:

• Those with strong charitable intent
• Investors seeking an immediate partial tax deduction
• Situations where lifetime income is the priority
• Those comfortable with irrevocable charitable commitments
• Scenarios where the partial tax deduction is valuable

DST Ideal For:

• Those prioritizing family wealth transfer
• Investors wanting maximum flexibility with proceeds
• Situations requiring potential access to principal
• Those needing customized payment scheduling
• Scenarios where charitable intent is not a driving factor

This DST vs tax deferral strategies comparison highlights how philosophical differences about wealth disposition often drive this decision.

UPREIT vs DST: The Real Estate Investment Trust Alternative

The DST vs tax deferral strategies analysis should include the Umbrella Partnership Real Estate Investment Trust (UPREIT) option:

UPREIT Basics

An UPREIT allows property owners to exchange real estate for operating partnership (OP) units in a REIT structure:

• Property owner contributes property to the REIT’s operating partnership
• Owner receives OP units instead of cash or REIT shares
• No immediate taxation on the exchange (similar to a 1031)
• OP units can later be converted to REIT shares (taxable event)
• Provides diversification across REIT’s property portfolio
• Typically generates regular income distributions

Key Differences: DST vs UPREIT

The DST vs tax deferral strategies comparison reveals notable contrasts:

Optimal Use Cases

The DST vs tax deferral strategies examination suggests these ideal scenarios:

UPREIT Ideal For:

• Real estate owners wanting to remain in real estate
• Those seeking professional property management
• Investors comfortable with REIT sector performance
• Those wanting potential liquidity through later conversion
• Scenarios where estate planning may eliminate tax entirely

DST Ideal For:

• Those seeking diversification beyond real estate
• Investors wanting customized payment structures
• Situations requiring maximum investment flexibility
• Those prioritizing controlled liquidity
• Scenarios where non-real estate assets are involved

This comparison demonstrates how UPREITs serve as another specialized option within the real estate sector.

Monetized Installment Sales vs DST: Contrasting Approaches

A more controversial DST vs tax deferral strategies comparison involves Monetized Installment Sales (MIS):

Monetized Installment Sale Basics

A Monetized Installment Sale structure attempts to provide immediate liquidity while deferring taxes:

• Seller conducts an installment sale with a 30-year payment
• Simultaneously obtains a loan for up to 95% of the sale price
• Loan proceeds provide immediate liquidity
• Loan is typically non-recourse against the seller
• Structure relies on specific interpretation of tax regulations
• Has faced increased IRS scrutiny in recent years

Key Differences: DST vs Monetized Installment Sale

The DST vs tax deferral strategies analysis highlights important distinctions:

Regulatory Considerations

The DST vs tax deferral strategies comparison must acknowledge regulatory differences:

• The IRS has specifically addressed certain monetized installment sale structures in Notice 2022-21
• The agency has identified some implementations as “transactions of interest”
• This designation requires specific disclosure and reporting
• Future regulatory clarification could impact availability and structure
• Proper legal guidance is particularly critical with these strategies

This comparison highlights the spectrum of risk tolerance within the tax deferral landscape.

Self-Directed IRAs vs DST: Retirement-Focused Comparison

Our DST vs tax deferral strategies analysis should include retirement-oriented options like Self-Directed IRAs:

Self-Directed IRA Basics

Self-Directed IRAs allow retirement account holders to invest in alternative assets:

• Operates under standard IRA rules with broader investment options
• Allows investment in real estate, private businesses, notes, etc.
• Growth occurs tax-deferred (traditional) or tax-free (Roth)
• Subject to contribution limits ($7,000 in 2024 for those under 50)
• Required Minimum Distributions begin at age 73 (as of 2023)
• Prohibited transaction rules restrict certain investments and activities

Key Differences: DST vs Self-Directed IRA

The DST vs tax deferral strategies comparison shows fundamental differences:

Optimal Use Cases

The DST vs tax deferral strategies analysis suggests these ideal applications:

Self-Directed IRA Ideal For:

• Retirement-focused investment strategy
• Smaller regular investments over time
• Those seeking tax-free growth (Roth)
• Younger investors with longer time horizons
• Situations involving smaller investment amounts

DST Ideal For:

• Immediate large asset sale scenarios
• Those needing income prior to retirement age
• Custom distribution timing requirements
• Situations involving substantial capital gains
• Those seeking maximum flexibility in distributions

This comparison demonstrates how these strategies serve different timing needs and asset scenarios.

Strategic Decision Framework: Choosing the Right Strategy

With our comprehensive DST vs tax deferral strategies comparison complete, here’s a framework for making the optimal selection:

Key Decision Factors

Consider these elements when evaluating options:

1. Asset Type and Value

• What specific asset(s) are you selling?
• What is the approximate value and built-in gain?
• Are there special characteristics affecting eligibility for certain strategies?

2. Timeline Requirements

• How quickly do you need to complete the transaction?
• Do you have flexibility to meet strict deadlines?
• What is your timeline for accessing proceeds?

3. Income and Liquidity Needs

• What are your immediate and long-term cash flow requirements?
• Do you need lump-sum access or structured payments?
• How important is payment flexibility?

4. Investment Preferences

• Do you want to remain in the same asset class or diversify?
• What level of investment control do you desire?
• What is your risk tolerance for replacement investments?

5. Tax Considerations

• What is your current vs. anticipated future tax situation?
• Are you seeking deferral only or potential forgiveness?
• How important are immediate tax deductions?

6. Legacy and Estate Planning

• Do you plan to transfer wealth to heirs?
• Is charitable giving a priority?
• What is your desired balance between lifetime enjoyment and legacy?

Strategy Selection Matrix

This simplified matrix compares strategies across key dimensions in the DST vs tax deferral strategies landscape:

This framework provides a starting point for evaluating which strategy best aligns with your specific priorities and constraints.

Case Studies: Tax Deferral Strategy Selection

To illustrate the practical application of our DST vs tax deferral strategies analysis, consider these case studies:

Case Study 1: Business Owner Retirement

Scenario:

• 63-year-old business owner selling manufacturing company
• $8.5 million sale price with $7.5 million gain
• Desires retirement income with minimal management responsibilities
• Prioritizes asset protection and estate planning
• No interest in acquiring new operating businesses

Strategy Selection Process:

• 1031 Exchange: Not applicable for business sale
• Qualified Opportunity Zone: Rejected due to development responsibilities and risk
• Charitable Remainder Trust: Considered but rejected due to insufficient charitable intent
• Deferred Sales Trust: Selected for investment diversity and income flexibility

Outcome:

• Implemented DST with balanced portfolio
• Structured $425,000 annual distributions
• Created contingency provisions for healthcare expenses
• Established succession plan for heirs
• Achieved tax deferral while transitioning to passive income

Case Study 2: Real Estate Investor Consolidation

Scenario:

• 58-year-old real estate investor with multiple rental properties
• Seeking to simplify holdings while remaining in real estate
• Strong market knowledge with continued interest in property selection
• $4.3 million in potential capital gains across properties
• Desire for continued control over investment decisions

Strategy Selection Process:

• Deferred Sales Trust: Considered but rejected due to preference for direct property ownership
• Qualified Opportunity Zone: Rejected due to geographic limitations
• UPREIT: Rejected due to desire for property selection control
• 1031 Exchange: Selected for tax deferral while maintaining real estate focus

Outcome:

• Completed series of 1031 exchanges over 18 months
• Consolidated 12 properties into 3 larger investments
• Simplified management while maintaining real estate exposure
• Successfully deferred all $4.3 million in capital gains
• Retained control over property selection and management

Case Study 3: Hybrid Approach for Art Collection

Scenario:

• 70-year-old widow selling substantial art collection
• $12 million sale value with $9 million capital gain
• Dual objectives: retirement security and philanthropy
• Desire to benefit both family and charitable causes
• Need for simplified asset management

Strategy Selection Process:

• 1031 Exchange: Not applicable for art collection
• Monetized Installment Sale: Rejected due to regulatory concerns
• Considered multiple strategies for different components

Outcome:

• Split collection into multiple strategic dispositions:
  • 60% to Deferred Sales Trust for income security
  • 30% to Charitable Remainder Trust for tax deduction and additional income
  • 10% direct donation for immediate tax benefit
• Created complementary income streams
• Balanced family security with philanthropic goals
• Achieved partial immediate tax benefits with long-term deferral
• Simplified ongoing management requirements

These case studies demonstrate how the DST vs tax deferral strategies decision involves matching specific strategies to individual circumstances and priorities.

Combining Strategies: Hybrid Approaches

The DST vs tax deferral strategies landscape sometimes benefits from combining multiple approaches:

Common Hybrid Combinations

Strategic combinations can maximize benefits in certain scenarios:

1. Partial 1031 Exchange + DST

• Use 1031 for properties you want to continue owning
• Use DST for properties you want to exit completely
• Benefits: Maintains some direct real estate while diversifying other portions

2. CRT + DST Combination

• Place portion of assets in CRT for charitable impact and tax deduction
• Use DST for portion focused on family wealth transfer
• Benefits: Balances philanthropy with family financial security

3. Qualified Opportunity Zone + DST

• Use QOZ for specific development projects of interest
• Implement DST for more conservative portion of portfolio
• Benefits: Captures QOZ tax benefits while diversifying risk

4. Sequential Strategy Implementation

• Use 1031 Exchange initially to consolidate properties
• Later implement DST when ready to exit active management
• Benefits: Matches strategies to changing life stages and objectives

Implementation Considerations

Successful hybrid approaches in the DST vs tax deferral strategies context require:

• Coordinated professional guidance across disciplines
• Clear segregation of assets for different strategies
• Comprehensive documentation of each strategy’s implementation
• Integrated tax planning approach
• Coordinated income planning across multiple sources

These hybrid approaches demonstrate that the DST vs tax deferral strategies decision isn’t always an either/or choice.

Tax Law Considerations and Future Outlook

The DST vs tax deferral strategies landscape exists within an evolving tax and regulatory environment:

Current Tax Law Impact

Current tax provisions significantly impact strategy selection:

• Capital gains rates and potential changes
• State tax considerations and domicile planning
• Step-up in basis rules and potential modifications
• Estate and gift tax exemption amounts
• Specific provisions affecting each strategy

Potential Legislative Changes

Several potential changes could affect the DST vs tax deferral strategies comparison:

• Proposed capital gains rate increases
• Potential modifications to 1031 exchange provisions
• Changes to step-up in basis rules
• Adjustments to estate tax exemptions
• Qualified Opportunity Zone program extensions or modifications

Strategy Adaptation Approaches

Given uncertainty, consider these approaches when implementing tax deferral strategies:

• Build flexibility into structures where possible
• Consider contingency provisions for legislative changes
• Maintain relationships with advisory team for ongoing monitoring
• Schedule regular strategy reviews
• Consider phased implementation to spread regulatory risk

This forward-looking perspective ensures your DST vs tax deferral strategies decision remains optimal as the landscape evolves.

FAQs: DST vs Tax Deferral Strategies

Which tax deferral strategy has the lowest implementation costs?

Traditional installment sales typically have the lowest setup costs, followed by 1031 exchanges. DSTs, CRTs, and more complex structures generally involve higher implementation costs due to their sophisticated legal requirements and ongoing administration.

Can I combine multiple tax deferral strategies for the same asset sale?

In some cases, yes. For example, you might direct a portion of proceeds to a Charitable Remainder Trust and another portion to a Deferred Sales Trust. However, this requires careful planning and proper sequencing to avoid disqualifying any of the strategies.

Which strategy provides the greatest flexibility for changing plans in the future?

The Deferred Sales Trust generally offers more flexibility than most alternatives, with potential for distribution schedule adjustments and investment policy modifications. Strategies like Charitable Remainder Trusts and 1031 exchanges have more rigid requirements and limited modification options once established.

How do these strategies compare for assets other than real estate?

The DST offers significant advantages for non-real estate assets since 1031 exchanges are now limited to real property only. Business sales, art, collectibles, and investment portfolios often have fewer tax deferral options, making the DST’s flexibility particularly valuable in these scenarios.

What happens if tax laws change after implementing one of these strategies?

Generally, tax law changes are not retroactive for already-implemented structures, though this can vary. Most existing arrangements would be grandfathered under previous rules, but ongoing transactions and future decisions might be affected by new legislation.

The DST vs tax deferral strategies landscape offers a range of options for investors seeking to minimize tax impacts while achieving their financial objectives. By carefully analyzing the features, benefits, and limitations of each approach, you can select the strategy—or combination of strategies—that best aligns with your specific circumstances and goals.

Disclaimer: This article is for informational purposes only and does not constitute legal, tax, or investment advice. Always consult with qualified professionals regarding your specific circumstances.

Additional Resources

• Internal Revenue Code Section 453: Installment Sales
• IRS Section 1031 Exchange Information
• IRS Guidance on Qualified Opportunity Zones