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Deferred sales trust vs installment sale: how each works, what it costs, and the IRS questions

A deferred sales trust is marketed as a way to sell real estate or a business, skip the 1031 exchange, and pay the capital gains tax over time. Underneath, it is an installment sale under IRC Section 453 with a trust in the middle. That trust adds flexibility, fees and legal questions. Here is how it compares with a plain installment sale and a 1031 exchange.

Free education from the Retirement Literacy Foundation, a 501(c)(3). Start with the free one-page Big Sale Tax Worksheet below and run your own numbers.

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Know the number you would be deferring before you compare structures: basis, gain, recapture, the 3.8% check and state tax, on one page. Free from a 501(c)(3); nothing to buy.

Adjusted basis, step by step (improvements, depreciation, prior 1031)
Your gain split: 25% recapture slice vs. 0/15/20% capital gain, plus the 3.8% NIIT check
The tax-vs-cash check: does the cash at closing cover the tax?
Questions to take to your CPA (1031 boot, installment sales, DSTs)

The Retirement Literacy Foundation is a 501(c)(3) public charity (EIN 41-5062266). General education, not tax advice. We don’t sell financial products. Email only; unsubscribe any time.

The mechanics

How a deferred sales trust is set up

Before any sale is agreed, a trust is created with an independent trustee. The seller cannot be the trustee or control it.
The seller sells the property to the trust in exchange for an installment note, a promise to pay over time.
The trust sells the property to the real buyer for cash. Because the trust’s basis is the price it paid, it has little or no gain of its own.
The trust invests the cash and pays the seller principal and interest under the note. The seller reports gain on Form 6252 as principal arrives, like any installment sale.

In one sentence: the tax deferral comes from Section 453, not from the trust. The trust exists so the buyer can pay cash while the seller still receives installments.

The questions a CPA will ask

What the IRS has, and has not, said

No IRS ruling approves the structure. The IRS has not issued a revenue ruling or regulation blessing deferred sales trusts as a category. Promoters point to Section 453 and general trust law.
Agency and step-transaction risk. If the trust is effectively the seller’s agent, or the sale to the trust and the resale to the buyer are treated as one transaction, the IRS can treat the seller as receiving the cash, and the whole gain becomes taxable in the year of sale. Independence of the trustee and real economic risk in the trust are central.
Constructive receipt. A seller who can demand the money, control how it is invested, or borrow against the note risks being taxed as if the cash had been received (Treas. Reg. 1.451-2(a); IRC 453A(d) on pledges).
Related structures under scrutiny. In 2023 the IRS proposed treating “monetized installment sales,” where a seller receives an installment note and a same-sized loan, as listed transactions that must be disclosed. A deferred sales trust is a different arrangement, but it shows how closely the IRS watches Section 453 workarounds.

Side by side

Deferred sales trust vs installment sale vs 1031 exchange

	Plain installment sale	Deferred sales trust	1031 exchange	Sell and pay the tax
Who holds the money	The buyer, who owes you on a note	A trust with an independent trustee	A qualified intermediary, then new property	You
Tax basis for deferral	IRC 453, settled law	IRC 453, with the trust structure untested by any IRS ruling	IRC 1031, settled law	None
Must buy real estate?	No	No	Yes, within 45 and 180 days	No
Where payments come from	The buyer’s ability to pay	How the trust’s investments perform	Rent from the new property	n/a
Typical costs	Legal fees for the note and security documents	Setup and legal fees, plus ongoing trustee and investment management fees; get them in writing	Intermediary fee, closing costs	The tax itself
Taxed in year of sale anyway	Ordinary-income recapture (IRC 453(i)) and mortgage over basis	Same	Any cash or debt relief not replaced (boot)	Everything
Main risks	Buyer default	IRS challenge, investment losses, fees, trustee risk	Missing the deadlines; the new property	None after payment
At death	Unpaid gain is income in respect of a decedent, with no step-up	Same, per the note	Heirs generally get a step-up	Cash gets a step-up

The 1031 vs Delaware Statutory Trust vs installment sale page covers the 1031 side in detail. Note the naming overlap: a Delaware Statutory Trust (also “DST”) is 1031 replacement property, and has nothing to do with a deferred sales trust.

Before you sign

Questions to ask anyone offering a deferred sales trust

What are the total fees: setup, legal, annual trustee and investment management? Put them in writing as dollars per year on my sale.
Who is the trustee, how are they independent of you, and who chooses the investments?
What happens to my payments if the trust’s investments lose money?
Can I change the payment schedule later, and what does that do to the tax?
What written tax opinion supports the structure, who wrote it, and will they stand behind it if the IRS asks?
How are you paid, and are you licensed or registered for what you are recommending?
What must be in place before I accept an offer on my property?

Take the answers to your own CPA or tax attorney, one who is not paid by the promoter, before you sign a purchase agreement. For how installment gain is reported, see Form 6252 and the installment sale.

Free · one page · fill in your own numbers

Run your own numbers before you decide.

Know the number you would be deferring before you compare structures: basis, gain, recapture, the 3.8% check and state tax, on one page. Free from a 501(c)(3); nothing to buy.

Adjusted basis, step by step (improvements, depreciation, prior 1031)
Your gain split: 25% recapture slice vs. 0/15/20% capital gain, plus the 3.8% NIIT check
The tax-vs-cash check: does the cash at closing cover the tax?
Questions to take to your CPA (1031 boot, installment sales, DSTs)

The Retirement Literacy Foundation is a 501(c)(3) public charity (EIN 41-5062266). General education, not tax advice. We don’t sell financial products. Email only; unsubscribe any time.

Audit trail

Sources and review

Reviewed for the Retirement Literacy Foundation, a 501(c)(3) education nonprofit. Prepared by Hans Goldstein, retirement educator; IRS Special Enrollment Examination Parts 1, 2 and 3 passed, enrollment pending; California licensed insurance professional #4273294. Informational only. Not tax, legal or investment advice. Every figure below cites its source so your CPA or attorney can check it.

Capital gains rates and brackets 2026: IRS Rev. Proc. 2025-32 (2026 inflation adjustments); IRC 1(h)
Net investment income tax 3.8%: IRC 1411; thresholds $200,000 single / $250,000 MFJ, not indexed
Depreciation recapture 25% (unrecaptured 1250) and 1245: IRC 1(h)(6), IRC 1245, IRC 1250; IRS Pub. 544
Section 121 home-sale exclusion: IRC 121; IRS Pub. 523; surviving-spouse 2-year rule IRC 121(b)(4)
1031 exchange rules: IRC 1031 (real property only after TCJA 2017); Treas. Reg. 1.1031(k)-1 (45/180 days, QI); IRS Form 8824
Delaware Statutory Trust as 1031 property: IRS Rev. Rul. 2004-86
Installment sales: IRC 453; IRS Pub. 537; Form 6252; IRC 453A interest charge above $5,000,000; IRC 453(k) excludes publicly traded stock
Monetized installment sales: IRS Dirty Dozen (IR-2023-54 and later); proposed regs REG-109348-22
QSBS: IRC 1202 as amended by P.L. 119-21 (2025): $15M cap, tiered holding periods for stock issued after July 4, 2025
Charitable remainder trusts: IRC 664; Treas. Reg. 1.664; pre-arranged sale doctrine (Rev. Rul. 78-197)
Step-up in basis: IRC 1014; community property IRC 1014(b)(6)
Inherited IRA 10-year rule: IRC 401(a)(9)(H) (SECURE Act); Treas. Reg. 1.401(a)(9) final regs 2024
California treatment: Cal. Rev. & Tax. Code 17041 (rates), 18031 (1031 conformity), FTB Form 3840 (out-of-state exchange tracking); Prop 19 (Cal. Const. art. XIII A, sec. 2.1)
Purchase price allocation: IRC 1060; IRS Form 8594

Figures are 2026 federal amounts and 2025 California rates unless stated. Examples are illustrative, rounded, and assume no other income; your numbers will differ. Last reviewed September 28, 2026.

Deferred sales trust vs installment sale: how each works, what it costs, and the IRS questions

Get the free Big Sale Tax Worksheet.

How a deferred sales trust is set up

What the IRS has, and has not, said

Deferred sales trust vs installment sale vs 1031 exchange

Questions to ask anyone offering a deferred sales trust

Run your own numbers before you decide.

Sources and review

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