A client forwarded us a pitch last year. It offered "a DST that defers your gain without the 45 day pressure." He assumed it was the same thing we had been discussing with him for months.
It was not. Three letters, two entirely different arrangements, and the difference matters more than almost any other distinction in this field.
The collision
A Delaware Statutory Trust is a vehicle for holding real property. Investors hold a direct undivided beneficial interest in the underlying real estate, and the IRS confirmed in Revenue Ruling 2004-86 that a properly structured interest can serve as replacement property in a 1031 exchange. It has a ruling, settled practice, and decades of use.
A Deferred Sales Trust is something else entirely: a promoted structure in which a third party trust buys your property using an installment note, sells it for cash, and pays you over time. Its deferral depends on the installment sale rules being respected on those particular facts. There is no ruling that blesses it by name.
Both get abbreviated to DST in marketing material. We have had clients arrive at a first meeting genuinely unsure which one they were being sold.
Statutory routes and promoted ones
The clearest test is whether you can point at the provision that produces the result.
| Route | Footing |
|---|---|
| 1031 exchange | Section 1031, with regulations and decades of practice |
| Installment sale | Section 453, ordinary and well understood |
| Opportunity zone fund | Statutory, with its own rules and timetable |
| Charitable remainder trust | Statutory, irrevocable, genuinely charitable |
| Promoted deferral structures | Rely on how general rules apply to a bespoke arrangement |
That last row is not an accusation. Some arrangements in it are defensible on their facts. The point is that the burden sits differently: with a 1031 you are following a path the code lays out, and with a promoted structure you are relying on an argument somebody has assembled.
It is also worth knowing that the IRS has publicly warned about certain monetized installment sale arrangements in its published guidance on abusive schemes. That does not characterize every alternative structure, and it does tell you the category receives attention.
The questions worth asking
If a structure is presented to you, five questions separate the serious from the rest:
- Which code section produces this result? A clear answer is a good sign. A long answer about how several provisions combine is a different kind of signal.
- Who is advising me, and are they paid if I proceed? A promoter's opinion of their own product is not advice.
- Will my own CPA sign the return? Ask them before you sign anything, not after. If your CPA is uncomfortable, that is information.
- There is an opinion letter. Who wrote it, who is it addressed to, and what does it actually conclude? Opinions are often narrower than the brochure suggests.
- If the IRS disagrees, who bears the cost? You, generally. Confirm it rather than assume somebody stands behind it.
When an alternative genuinely makes sense
Plenty of situations where a 1031 is the wrong tool, and in those cases looking elsewhere is sensible rather than suspicious:
- You would realize a loss, where deferral works against you, as we set out in underwater property.
- The property is inventory rather than investment, which is the dealer problem and disqualifies the exchange outright.
- You want out of real estate entirely, where an installment sale or a charitable structure may fit your actual goal better.
- You have already missed a deadline, and the question is now damage control rather than deferral.
In each of those, the honest answer is that a 1031 does not help and something else might. What we would not do is reach for a bespoke structure because the 45 day window felt inconvenient. The constraints exist, they are survivable with planning, and the sequencing in our exchange process is built around them. Your own CPA and attorney, paid by you and not by a promoter, should review any structure before you commit.
Common questions about deferred sales trusts
Is a Deferred Sales Trust the same as a Delaware Statutory Trust?
No. A Delaware Statutory Trust holds real property and can serve as 1031 replacement property. A Deferred Sales Trust is a promoted structure relying on installment sale treatment.
Does a Deferred Sales Trust avoid the 45 day deadline?
It is marketed that way because it is not a 1031 exchange at all. The relevant question is whether its own tax treatment holds up, which is where you need independent advice.
Are these structures illegal?
That is not the right framing. Some arrangements are defensible on their facts and the IRS has publicly warned about certain monetized installment sale arrangements. Get advice from someone who is not selling it to you.
What should I ask a promoter?
Which code section produces the result, who wrote the opinion letter and what it concludes, whether your own CPA will sign the return, and who bears the cost if the IRS disagrees.
When is an alternative to a 1031 the right answer?
When you would realize a loss, when the property is inventory, when you want out of real estate entirely, or when a deadline has already been missed.
Disclosure: Numerical example is for illustration purposes only; individual circumstances will vary.