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The idea behind a deferred sales trust is to sell the real estate asset to the trust with an installment sale. The trust then sells the real estate to the buyer, and the funds are placed in the trust without paying taxes on the capital gains.
The trust doesn’t have any capital gains taxes because it sold the real estate asset for the same amount it paid for it with the installment sales contract. As the seller, you don’t pay any capital gains taxes yet because you haven’t constructively received (physically received) the funds from the sale.
The installment contract from the sale can be set up any way you wish. You can begin receiving installment payments right away or defer them for several years.
The third-party trustee can invest the funds however you like. You can earn interest income on the money from the real estate sale while it sits in the trust. You only begin paying capital gains taxes when you start receiving principal payments.
(purchase price + capital improvements – depreciation)
(net sales proceeds – adjusted basis)