Deferred Sales Trust for Real Estate: Gain Deferral, Risk, and the 2026 Landscape

The deferred sales trust mechanics are surprisingly elaborate for a structure that boils down to an installment sale. The seller first identifies an interested buyer for the real estate at market value. The seller then engages a DST promoter or independent trustee to form an irrevocable trust. The trust is typically a third-party administered trust with an independent corporate trustee, established under the laws of a state with favorable trust law (often Delaware, Nevada, or South Dakota). The trust agreement sets out the investment objectives, the installment payment schedule, and the trustee’s authority. The seller does not control the trust but is a beneficiary entitled to the installment payments.

Once the trust is formed, the seller and the trust sign a purchase and sale agreement. The seller transfers the property to the trust in exchange for an installment promissory note. The note specifies the principal amount (equal to the property’s sale value), the interest rate (typically 3% to 6% based on market conditions and applicable federal rates under §1274), the payment schedule (typically monthly or quarterly principal and interest payments over 10 to 20 years), and any prepayment provisions. The note is the consideration the seller receives, and it is what allows §453 installment sale treatment to apply.

Simultaneously or shortly after the transfer from the seller to the trust, the trust sells the property to the actual cash buyer at the same purchase price. The trust receives cash. The trust now has cash assets and owes the seller installment payments under the note. The seller has transferred the property and is receiving an installment income stream. The §453 election applies to the seller’s transaction with the trust, deferring the gain over the installment period. The trust’s subsequent sale of the property to the cash buyer is a separate transaction that produces little or no gain because the trust’s basis in the property (equal to the price it paid the seller) is the same as its sale price.

The trust invests the cash proceeds according to the investment guidelines in the trust document. Most DSTs use a diversified portfolio managed by a third-party investment advisor or by the trustee’s internal investment team. The portfolio typically targets returns in the 5% to 8% range, depending on the risk allocation. The investment returns fund the installment payments to the seller. If returns exceed the required payments, the excess accumulates in the trust as additional principal or as a fund for late-period payments. If returns fall short, the trust may need to liquidate principal to make the payments, which depletes the trust’s ability to make future payments.

The seller receives the installment payments under Form 6252. Each payment consists of three components: a return of basis (no tax), interest income (taxed as ordinary income), and gain recognition (taxed at long-term capital gains rates if the original property qualified for long-term treatment). The ratio of these components is fixed at the time of sale based on the gross profit ratio calculation. The deferred sales trust real estate structure produces a stream of payments that mirror what an installment sale to an unrelated buyer would produce, except that the seller is not exposed to the credit risk of an individual buyer because the trust’s investment portfolio supports the payments.

Trustee responsibilities throughout the installment period include managing the investment portfolio, making the scheduled payments to the seller, filing trust tax returns (Form 1041) annually, distributing K-1s to beneficiaries if required, and maintaining all the documentation that supports the trust’s independence and economic substance. The trustee fee compensates for this ongoing administration. The fee structure is typically a percentage of trust assets per year (1% to 2%) plus a setup fee at inception. Over a long installment period, the cumulative fees can be substantial, but they are a real cost of the structure that must be priced into the decision.

Termination of the deferred sales trust structure happens when the installment note is fully paid. The trust distributes any remaining assets to the beneficiaries (typically just the seller, or the seller’s heirs if death occurred during the installment period) and terminates. At that point, the seller has received the full sale proceeds plus interest, the full gain has been recognized over the installment period, and the structure has done its job. Some DSTs include provisions for early termination if the seller wants to accelerate payments, but doing so accelerates the gain recognition and defeats the purpose of the deferral.

Death during the installment period is an important planning consideration. The installment note has a value at the date of death, which is included in the seller’s gross estate for estate tax purposes. The note may receive a basis step-up under §1014 to the FMV at death, but the IRS has taken the position in some cases that installment notes do not qualify for the step-up because the deferred gain is income in respect of a decedent under §691. The heirs may inherit the obligation to recognize the deferred gain as the installment payments come in, taxed at the heirs’ rates rather than the original seller’s rates. This is an area of meaningful tax uncertainty and depends on facts.

The Reed Corporation typically does not promote the deferred sales trust real estate structure, but we have clients who use it and we provide ongoing tax compliance and planning support. The structure works when properly executed and when the underlying §453 mechanics are respected. The structure fails when sellers retain too much control, when the trust lacks economic substance, or when the promoter cuts corners on the documentation. Sellers considering a DST should engage independent counsel to review the trust documents before signing and should make sure their CPA is comfortable supporting the structure on the seller’s tax returns going forward. The downstream tax compliance is the seller’s responsibility, not the promoter’s, and getting it right requires sustained engagement over the full installment period.

One last mechanical point. The trustee’s compensation is typically a percentage of trust assets per year plus a setup fee. Over a 20-year installment period on a $5M trust, cumulative trustee fees can run $700,000 to $1.4M depending on the fee structure. This is a real cost that erodes the seller’s after-tax return. We model the fee impact alongside the gain deferral benefits to give clients a clear picture of net economics. The deferred sales trust structure pencils when the gain deferral plus the diversification benefit clearly exceeds the trustee fee plus the tax risk premium. For very small trusts (under $2M), the fixed setup costs and minimum annual fees often make the structure uneconomic. For very large trusts ($20M+), the percentage fee structure compounds significantly and should be negotiated carefully. The right trustee relationship is one where the fees are fair for the work performed and the trustee has the resources to defend the structure on audit if needed.

The risks of a deferred sales trust transaction fall into three buckets: tax risk, investment risk, and structural risk. Tax risk is the headline concern because if the IRS attacks the structure successfully, the seller recognizes the full gain in the year of sale plus interest and penalties. The IRS has not issued specific guidance approving DSTs, which leaves the structure relying on general §453 principles and case law. The economic substance doctrine under §7701(o) is the most likely attack vector. If the trust is a sham or a conduit, the IRS can disregard the entity and treat the seller as having sold directly to the cash buyer with full gain recognition.

The economic substance test asks whether the transaction has meaningful economic effect separate from tax consequences and whether the taxpayer has a substantial non-tax purpose for it. A DST that is essentially a tax-only vehicle fails. A DST with real investment activity, real fiduciary duties, real separation between trustee and seller, and a real economic purpose (diversification, income stream, getting out of real estate management) passes. The line is fact-specific, and the IRS has discretion to make the call. The deferred sales trust structure is more vulnerable to this attack than a §1031 exchange or a direct installment sale because of the layered trust mechanics.

Investment risk in a DST is real and often underestimated by sellers focused on the tax benefits. The trust invests the proceeds in a portfolio, and that portfolio’s performance determines whether the trust can fund the installment payments. If the portfolio underperforms (a market downturn, bad investment selection, high fees eating into returns), the trust may exhaust principal before the installment period ends. The seller is then dependent on whatever assets remain. Most DSTs are not insured against investment loss, and the seller has limited recourse against the trustee absent fraud or gross negligence. The seller has effectively traded direct ownership of an income-producing asset for an unsecured claim against a trust’s investment performance.

Counterparty risk runs alongside investment risk. The trustee is an independent third party, and the seller depends on that trustee for accurate administration, fair fee assessment, and competent investment oversight. Trustees can fail. Trustees can be acquired or merged or wound down. The trust document specifies what happens in those events, but the practical reality is that the seller has limited control. Choosing a trustee with strong fiduciary credentials, sufficient capital backing, and a track record in DST administration matters. Promoter-recommended trustees are often the same firm that promoted the structure, which creates a conflict of interest the seller should evaluate carefully.

Structural risk involves the documentation and execution of the deferred sales trust transaction itself. Poorly drafted trust agreements, side agreements that compromise economic substance, sloppy installment notes with non-commercial terms, or inadequate documentation of the seller’s intent can all undermine the §453 treatment. The structure depends on every component being defensible on audit. A single weak link (a side letter giving the seller investment direction, for example) can collapse the entire structure. The promoter selling the DST may not be the party defending it on audit ten years later. The seller bears the audit risk, not the promoter.

California has explicitly attacked the deferred sales trust structure for state tax purposes through Legal Ruling 2021-1. California treats the gain as fully recognized in the year of sale for state purposes, even if the federal treatment under §453 defers the gain. A California-source sale (real estate located in California) by any seller using a DST will face this state-level attack. Other states have not been as aggressive, but the trend has been toward more state scrutiny. Sellers with property in states with active DST enforcement should price the state tax acceleration into the decision.

The IRS has historically chosen audit targets carefully, focusing on the most aggressive or poorly documented structures. A well-documented DST with strong economic substance and an experienced trustee is less likely to be targeted than a thinly documented DST sold by a marginal promoter. But targeting is not a defense if the audit happens. The seller needs to be prepared to defend the structure on its merits, which means having complete documentation, retained tax advisors who understand the structure, and the financial resources to fund a multi-year audit defense if necessary. Audit defense for a DST can run $50,000 to $200,000 in professional fees through Tax Court litigation.

Phantom income is a separate risk worth mentioning. The seller recognizes gain on the installment payments as received, but the seller may not actually receive the cash if the trust underperforms or if the payment schedule front-loads gain recognition into early years when investment returns are still building. The mismatch between recognized gain and cash received can create cash flow problems for sellers who need the payments for living expenses. The promoter should model this carefully, but many do not. Sellers should run their own cash flow projection that accounts for the gain recognition timing alongside the actual payment receipts.

The Reed Corporation generally recommends that clients pursuing a deferred sales trust strategy obtain a written tax opinion from independent counsel before signing. The opinion costs $15,000 to $40,000 but provides meaningful audit defense and forces a careful review of the structure’s economic substance. The opinion is also useful if the IRS later challenges the structure, as it can demonstrate good faith reliance on professional advice and reduce penalty exposure under §6664. The audit risk for a DST is non-trivial and concentrated, which makes the upfront investment in a strong opinion worthwhile. Sellers who rely on the promoter’s marketing materials alone are taking a much larger risk than they realize.

One final structural risk to flag. The DST promoter industry has consolidated significantly over the past five years, with several major promoters facing regulatory scrutiny or business restructuring. A seller who entered a DST with a promoter that subsequently exits the business or transfers administration to a different firm may find the trust’s documentation, investment management, or compliance support degraded. The contractual right to defend the structure on audit may also become uncertain. We advise clients to research the promoter’s track record, financial stability, and continuity plans before signing. The deferred sales trust path is a long-term commitment that depends on the promoter and trustee being around to support the structure over 15+ years. A promoter that disappears after the upfront fees are paid leaves the seller exposed.

The choice between a deferred sales trust transaction and a §1031 exchange depends almost entirely on what the seller wants to do with the proceeds. If the seller wants to stay in real estate, §1031 is the right answer almost every time. The §1031 framework is settled law, low audit risk, complete gain deferral, and well understood by the entire real estate industry. The replacement property requirements (45-day identification, 180-day closing, like-kind property, equal or greater value) are tight but manageable with proper planning. The deferred sales trust real estate path adds complexity, cost, and risk that §1031 does not have. For a seller selling one multifamily building to buy another multifamily building, §1031 wins.

If the seller wants to get out of real estate entirely, the calculus changes. Section 1031 does not work for a seller who wants diversification into stocks, bonds, or other non-real-estate assets. The seller would have to recognize the full gain currently and then invest the after-tax proceeds. A DST allows the seller to defer the gain while diversifying into a broader investment portfolio. The trade-off is the tax risk, the structural complexity, and the ongoing trustee fees. The deferred sales trust structure shines when the seller’s primary objective is exit from real estate combined with gain deferral.

Hybrid strategies are sometimes possible. A seller can do a partial §1031 exchange, reinvesting some of the proceeds in a replacement property and taking the rest as boot. The boot is taxed currently, but the §1031 portion defers the rest. This works when the seller wants to scale down their real estate position rather than exit entirely. The DST is a different alternative for the cash-out portion: the seller could in theory combine a §1031 exchange on part of the property with a DST on another part, though the mechanics get complicated and we generally do not recommend this layered approach.

Tax cost comparison is straightforward in pure financial terms. A §5M property sale with a $4M gain at a 47% combined marginal rate would produce $1.88M of tax if fully recognized currently. A §1031 exchange defers the entire $1.88M into the replacement property’s basis, producing zero current tax. A deferred sales trust structure with a 20-year installment period defers the same $1.88M proportionally over the payment stream, producing roughly $94,000 of recognized tax per year on equal annual payments. Both structures defer the gain. The difference is what happens after the deferral: §1031 keeps the seller in real estate, DST gets the seller out of real estate.

Audit risk comparison favors §1031 dramatically. Section 1031 has been on the books since 1921 with extensive IRS guidance, court cases, and a clear regulatory framework. The IRS audits §1031 exchanges occasionally but the framework is so well-settled that most audit issues are technical (boot calculations, related-party rules, timing) rather than existential. Section 1031 exchanges that follow the qualified intermediary safe harbor under Rev. Proc. 2000-37 are essentially audit-ready on the structural question. The deferred sales trust real estate structure has no comparable safe harbor and faces real risk of economic substance challenge.

Cost comparison also favors §1031. A typical §1031 exchange costs $1,500 to $5,000 in qualified intermediary fees plus the usual closing costs. A deferred sales trust structure costs $20,000 to $50,000 in setup fees plus 1% to 2% per year in trustee fees over the installment period. Over a 20-year horizon, the DST cumulative cost can exceed $500,000 to $1M for a large trust. The §1031 cost is a one-time expense at the exchange. The structural cost difference is significant and should be priced into the comparison.

Use cases where the deferred sales trust path wins despite the higher cost and risk include sellers approaching retirement who want to step out of active real estate management, sellers facing health issues that make ongoing property management impractical, sellers in family transitions (divorce, death of a spouse) that necessitate liquidation, and sellers who have already exhausted their §1031 reinvestment options and have unrealized gain they want to defer. In these cases, the DST may be the only way to achieve both gain deferral and the desired financial outcome.

The Reed Corporation runs the comparison in detail for every HNW client considering either structure. The analysis includes the gain calculation, the projected tax under each option, the cost structures, the audit risk profile, and the integration with the rest of the client’s tax and estate plan. The right answer often surfaces in the modeling rather than from a generic rule. Some clients who initially want a DST end up choosing §1031 once they see the cost structure laid out. Some clients who came in thinking §1031 was the answer end up choosing DST once they realize they cannot find acceptable replacement property within the 45-day window. The decision should be data-driven and client-specific, not promoter-driven.

One pattern we see consistently: promoters of deferred sales trust structures often pitch the DST as a superior alternative to §1031 because of the diversification angle. The pitch usually downplays the tax risk and the cost structure. Sellers should be skeptical of any pitch that does not directly compare the cost and risk of DST against §1031. A balanced analysis from an independent CPA or tax attorney almost always results in §1031 being chosen unless the seller has a specific reason (exit from real estate, retirement, etc.) that DST uniquely solves. The deferred sales trust real estate option has a legitimate place in tax planning, but it is not the universal answer that promoters sometimes suggest.

One last consideration. Sellers sometimes hybridize §1031 and DST structures to capture features of both. The seller does a partial §1031 exchange on a portion of the proceeds while sending the cash portion through a DST. This approach can work but introduces additional complexity and audit risk because the two structures must be coordinated carefully. The §1031 portion follows standard like-kind exchange rules including the qualified intermediary safe harbor. The DST portion follows the §453 installment sale framework. The two pieces cannot share assets or proceeds in ways that compromise either structure. We have seen hybrid arrangements work but generally recommend against them for clients who could achieve their goals through one structure or the other. The deferred sales trust option works best as a standalone, and §1031 works best as a standalone.

Interest income from the installment note in a deferred sales trust transaction is taxed as ordinary income to the seller in the year received, regardless of the §453 installment sale treatment of the gain portion. Each installment payment from the trust consists of three components under §453: a return of basis, a portion of the deferred gain, and an interest component. The interest component is calculated using the applicable federal rate under §1274 (or the stated rate on the note if higher) and reflects the time value of money over the installment period. That interest is fully taxable as ordinary income, not capital gain.

The applicable federal rate is published monthly by the IRS and reflects market interest rates by loan term. Short-term AFR (loans under three years), mid-term AFR (loans 3 to 9 years), and long-term AFR (loans over 9 years) all apply at different points. A 15-year DST installment note would use the long-term AFR in effect at the date of the original sale. The interest rate on the note must be at least the AFR or §483 imputed interest rules kick in, treating part of the principal payments as imputed interest taxable as ordinary income. Most DSTs set the note’s interest rate slightly above the AFR to avoid imputation issues.

Practical example. A seller sells a $5M property with a $4M gain to a DST, receiving a 20-year installment note with a 5% interest rate. The note’s annual payments are roughly $401,000 (level payments of principal and interest). In year one, approximately $250,000 of the payment is interest (5% on $5M) and $151,000 is principal. The interest is ordinary income, taxed at the seller’s marginal rate (37% federal plus state). The principal portion is split between return of basis ($30,200 based on the 20% basis-to-price ratio) and gain recognition ($120,800 at long-term capital gains rates of 20% federal plus state). The total tax in year one: roughly $114,000 on the interest, $44,000 on the gain, plus state and NIIT layers.

The deferred sales trust interest component is a significant tax cost over the long installment period. For a 20-year note on a $5M sale, total interest paid by the trust to the seller can run $2.5M to $5M depending on the interest rate. All of that interest is ordinary income. At a 47% combined marginal rate, the tax on the interest alone can exceed $1.5M over the installment period. This is real money that the seller would not pay under a fully-deferring structure like §1031 (which keeps the gain in the basis of the replacement property and does not generate ongoing interest income).

From the trust’s perspective, the interest paid to the seller is a deduction against the trust’s investment income. The trust files Form 1041 each year and reports its investment returns, the interest paid to the seller, and any other income or expenses. The trust’s net income (if any) is taxed at trust rates (which are compressed and reach the top bracket quickly) or distributed to other beneficiaries if the trust has multiple beneficiaries. Most DSTs are structured to minimize the trust’s own tax liability by distributing or paying out most of the investment returns.

How is interest income from a deferred sales trust installment note treated for state tax purposes follows the federal characterization. The interest is ordinary income for state tax in the state of the seller’s residence. New York taxes the interest at full state rates (up to 10.9%) plus NYC city tax for NYC residents (3.876%). California taxes at up to 13.3%. Texas, Florida, and other no-tax states impose no state-level tax on the interest. The state where the property was located does not generally tax the interest portion of the installment payments unless the state has an unusual sourcing rule, which is rare.

Net Investment Income Tax under §1411 applies to the interest income for high-income taxpayers. The 3.8% NIIT layer applies to all investment income above the threshold ($200,000 single, $250,000 married filing jointly). Interest from a DST installment note is investment income. The total marginal rate on the interest for a high-income NYC resident: 37% federal plus 3.8% NIIT plus 10.9% NY state plus 3.876% NYC equals roughly 55.6%. Half of every dollar of interest goes to tax. For sellers planning around the deferred sales trust structure, this tax drag on the interest portion is one of the most often-overlooked cost elements.

Some DST structures attempt to minimize the interest portion of the installment note to reduce the ordinary income tax exposure. This is dangerous because §483 (imputed interest) and §1274 (original issue discount) rules require a minimum interest rate or imputed interest gets applied anyway. The IRS has been aggressive about imputed interest in installment sales, and a DST that artificially understates the interest rate to favor capital gain treatment over ordinary income treatment will get challenged. The note’s interest rate must be set at or above the applicable federal rate to avoid imputation.

The Reed Corporation models the full lifecycle tax picture of a deferred sales trust transaction including the ordinary income tax on interest, the capital gain tax on the recognized gain portion, and the state tax layers for the seller’s specific residence. The model produces an after-tax payment stream that the seller can compare against alternatives (full gain recognition with after-tax investment, §1031 exchange, charitable remainder trust). The interest tax drag often shifts the analysis significantly. A DST that looks attractive on the gross gain deferral can look much less attractive once the interest income tax is factored in over a 15 or 20-year payment period. The detailed math matters, and sellers should not rely on promoter projections that focus only on the gain deferral side of the equation.

One final tax interaction worth mentioning. The seller’s home state may have different rules on installment note interest sourcing than on capital gain sourcing. New York sources interest based on the recipient’s residency, which means a New York resident who moves to Florida and continues receiving DST interest payments will eventually escape New York interest tax. California similarly sources interest based on residency. The combined federal-plus-state tax impact on the interest portion of DST payments can vary significantly based on the seller’s residency timeline. We model the multi-state residency picture for clients who plan to move during the installment period, capturing both the federal four-tier characterization and the state sourcing rules. The deferred sales trust structure is more flexible than some alternatives for taxpayers who plan to relocate, but the planning must be done deliberately.

Death during the installment period is one of the more complicated aspects of a deferred sales trust real estate structure, and the tax outcome depends on facts that are not always clear in the trust documents or in the underlying §453 rules. The installment note has a fair market value at the date of death, and that value is included in the decedent’s gross estate for federal estate tax purposes (currently against a $13.99M lifetime exemption for 2026, (made permanent through 2034 by the One Big Beautiful Bill Act) absent further legislation). Whether the deferred gain in the note also receives a basis step-up under §1014 is the contested question.

Section 1014 generally provides a basis step-up to FMV for property included in the gross estate. The step-up eliminates accumulated gain for income tax purposes. However, §691 carves out income in respect of a decedent (IRD), which does not receive a step-up. IRD is income that the decedent had a right to receive at death but had not yet recognized for income tax purposes. The IRS has taken the position in revenue rulings (Rev. Rul. 79-292 and related guidance) that installment note gain is IRD, not eligible for a basis step-up. Under that view, the heirs inherit the obligation to recognize the deferred gain as installment payments come in, taxed at the heirs’ income tax rates rather than benefiting from a step-up.

The deferred sales trust structure’s vulnerability to this IRD treatment is one of its biggest planning weaknesses for HNW clients with estate planning goals. A seller who held the property until death and was hit by a single estate-tax event would have transferred the property to heirs at full stepped-up basis under §1014, eliminating all the accumulated capital gain. Selling into a DST during life converts that future step-up opportunity into installment note IRD that the heirs continue to recognize. For very large gains, this can mean tens of millions of dollars of tax that would have been eliminated under the step-up but is preserved through the DST.

Estate inclusion of the installment note follows standard §2031 valuation rules. The FMV of the note at death is the present value of the remaining payment stream, discounted at the appropriate interest rate. For a 20-year note with 12 years remaining, the FMV would be the present value of the next 12 years of payments. The note’s FMV is typically discounted further if the trust’s investment portfolio has not performed well or if there are payment uncertainty concerns. The valuation discount can reduce estate tax exposure, but the IRS scrutinizes installment note valuations carefully and may challenge aggressive discounts.

Some DST structures attempt to address the IRD problem through specific trust drafting. A common approach is to allow the seller to designate beneficiaries or a successor trust that receives the remaining installment payments. The structure can sometimes channel the IRD through generation-skipping mechanisms or through charitable beneficiaries to reduce the income tax burden on the heirs. These structures are highly facts-specific and require careful coordination with the seller’s estate plan. The promoter selling the DST may not have estate planning experience, so the seller should engage independent estate counsel to review the inheritance mechanics.

Real example. A client age 68 sold a $10M commercial property into a deferred sales trust structure in 2024 with a 20-year installment note at 5%. He died in 2031 at age 75. The remaining installment payments had a present value of approximately $7M at the date of death. That $7M was included in his gross estate. His heirs inherited the right to receive the remaining payments. Under the IRD framework, the heirs continued to recognize the deferred gain on the original property sale as the payments came in over the remaining 13 years. They received no basis step-up on the deferred gain. The total income tax on the deferred gain over the inheritance period was approximately $1.8M at the heirs’ rates.

Compare to the alternative scenario where the client had held the property until death without selling. The property would have received a stepped-up basis under §1014, eliminating the entire $4M of accumulated gain. The property’s FMV at death would have been included in the gross estate (the same $10M, roughly), but the heirs could have sold it immediately for zero capital gain. The estate tax exposure would have been similar in both scenarios, but the heirs would have saved approximately $1.8M in income tax under the hold-to-death strategy. The deferred sales trust structure cost the family $1.8M in eliminated step-up benefit.

This is the most under-discussed risk of DST planning for HNW clients with significant estate planning sophistication. Promoters of the structure rarely emphasize the loss of the §1014 step-up because it makes the structure look worse. The IRD treatment is technical and depends on facts, but the default IRS position is unfavorable to the heirs. Clients with estate tax exposure and longevity uncertainty should consider this carefully before locking into a DST. The deferred sales trust structure can solve current diversification and income needs, but it does so at the potential cost of post-death tax benefits that would have applied under direct ownership.

The Reed Corporation works with clients and their estate planning attorneys to model the multi-generational tax outcome of a deferred sales trust transaction. The analysis includes the current-year tax savings from the gain deferral, the ongoing tax cost of the interest and gain recognition during the installment period, the estate tax inclusion of the installment note at death, and the IRD treatment of the remaining payments to the heirs. The full picture can shift the recommendation significantly. For clients near retirement age with significant estate planning concerns, we often recommend alternative structures (charitable remainder trusts, qualified personal residence trusts, family limited partnerships) that better preserve the §1014 step-up while still providing diversification or income planning. The DST is a useful tool but not the right tool for every situation, and the death scenario is one of the key tests that determines fit.

One last estate planning consideration on the IRD problem. The Reed Corporation works with clients to evaluate whether the deferred sales trust structure makes sense alongside other gain deferral mechanisms that better preserve the §1014 step-up. Charitable remainder trusts under §664 produce a different outcome: the trust assets pass to charity at death without IRD issues, and the donor’s heirs receive nothing from the trust but the donor enjoys lifetime income. Direct holding to death produces a step-up that eliminates accumulated gain but requires the seller to keep managing the real estate. Each option has trade-offs. For HNW clients with significant longevity uncertainty or aggressive estate planning goals, the DST is rarely the right answer because the IRD treatment compromises the step-up that would otherwise apply.