Deferred Sales Trust Risks

Deferred Sales Trust Risks

Why installment-sale deferral gets fragile when a trust is inserted between a seller and an already-identified buyer

May 6, 2026

Every few years a planning idea gets popular because it seems to solve a problem that clients understandably care about: "I have a large embedded gain, I want to sell, and I would rather not write the entire tax check this year." That is a reasonable planning problem. Section 453 installment sales can be a legitimate answer. The trouble starts when the planning pitch moves from "spread payments over time" to "sell for cash now, keep investment flexibility, and still defer the gain."

That is the tension inside many Deferred Sales Trust conversations. A Deferred Sales Trust, or DST, is not a separate Code section. It is a marketing name for a structure that tries to use the installment sale rules by having the seller transfer appreciated property to an independent trust in exchange for a note, after which the trust sells the property to the final buyer. If the structure is respected, the seller reports gain as principal payments are received. If it is not respected, the IRS can collapse the steps and treat the seller as having sold directly to the buyer for cash.

The takeaway: I do not view a Deferred Sales Trust as a tax-deferral shortcut. I view it as a high-documentation, high-scrutiny installment-sale structure where the risk is not the arithmetic. The risk is whether the transaction is respected at all.

The legitimate starting point is Section 453. The IRS describes an installment sale as a sale of property where at least one payment is received after the year of sale, and Publication 537 explains the basic mechanics: each payment is split between taxable gain, recovery of basis, and interest [1]. That rule is not controversial. A seller can finance a buyer directly, receive payments over time, and recognize gain over time if the property and transaction qualify.

For context, if a seller has a $10 million sale price and a $2 million basis, the economic gain is $8 million. At a combined top federal long-term capital gain and NIIT rate of 23.8 percent, the federal tax exposure is roughly $1.904 million before state taxes, depreciation recapture, and deal-specific adjustments [2][3]. A straight installment sale does not erase that tax. It changes the timing.

That timing difference can matter. Paying tax over 10 years instead of in year one may create real time-value-of-money benefit, smoother bracket management, and better coordination with charitable giving or other planning. But there is a tradeoff: the seller becomes a creditor. The seller no longer owns the property, no longer controls the buyer's cash, and accepts payment risk in exchange for deferral.

That creditor tradeoff is the foundation of a clean installment sale. If a structure tries to keep the deferral while removing the creditor tradeoff, the foundation starts to crack.

A Deferred Sales Trust adds a new party between the seller and the final buyer. The seller sells the asset to the trust for a promissory note. The trust then sells the asset to the buyer for cash. The trust invests the proceeds and makes scheduled payments back to the seller under the note.

The structure is trying to answer a practical problem: many buyers want to pay cash, not sign a long-term seller note. By inserting a trust, the seller hopes to convert a cash buyer into an installment sale. That is the appeal. It is also the risk.

The IRS and courts generally care about who really bore the benefits and burdens of ownership, who controlled the cash, whether the intermediary had a real business purpose, and whether the seller had actual or constructive receipt of the proceeds. If the trust only holds title briefly, if the final buyer was already locked in, if the trust is economically a pass-through, or if the seller controls the trust proceeds, the IRS has several paths to challenge the deferral.

I think of it like handing someone else the steering wheel while keeping your foot on the gas. If the documents say the other person is driving, but every economic decision still points back to you, the form is vulnerable.

The closest public IRS warning is not called a Deferred Sales Trust. It is the monetized installment sale. In Chief Counsel Advice 202118016, the IRS analyzed transactions where appreciated property was routed through an intermediary and the seller received loan proceeds tied directly or indirectly to the sale proceeds. The IRS flagged multiple problems, including no genuine indebtedness, economic benefit from escrowed funds, the Section 453A(d) pledging rule, and the possibility that the intermediary was not the true acquirer for Section 453 purposes [4].

Treasury and the IRS went further in 2023. Proposed regulations would identify monetized installment sale transactions, and substantially similar transactions, as listed transactions once finalized [5]. The proposed definition focuses on a seller with an already-identified buyer, a sale to an intermediary for an installment obligation, the intermediary's quick transfer to the buyer for cash, and a related loan or funding arrangement that gives the seller access to cash while the seller reports installment-sale treatment [5].

As of May 6, 2026, I found the rule still described in the public regulatory agenda as under review rather than finalized [6]. That distinction matters. A proposed regulation is not the same as a final listed-transaction regulation. But it would be a mistake to treat the proposal as harmless. The IRS has already put monetized installment sales on its Dirty Dozen list and warned high-income taxpayers to be wary of arrangements where promoters facilitate a purported installment sale for a fee while the seller gets the lion's share of the proceeds [7].

Not every Deferred Sales Trust is a monetized installment sale. A structure without seller borrowing, without collateralized access to the proceeds, and with a genuinely independent trust is different from the fact pattern in the proposed regulation. But the overlap is too important to ignore. If the economic result is "cash sale to a known buyer plus seller liquidity plus deferred tax," the IRS already has a roadmap for challenge.

Figure 1: A qualitative comparison of direct installment sales, Deferred Sales Trust structures, and monetized installment sale structures. The risk increases when a seller keeps access to sale proceeds while claiming installment-sale deferral.

The first risk is constructive receipt. If the seller can demand the proceeds, direct the proceeds, borrow against the proceeds, or otherwise control the cash in a way that is not meaningfully different from ownership, the IRS can argue the seller received payment in the year of sale. The phrase "I never touched the cash" is not enough. Tax law often asks whether the taxpayer had the economic benefit or control, not just whose account held the money.

The second risk is agency or conduit treatment. If the trust is not really buying the property for its own account, but is simply carrying out the seller's prearranged sale to the final buyer, the IRS can argue the seller sold directly to the buyer. This is where timing, title transfer, negotiation history, trustee independence, and business purpose become critical. The trust needs to be more than paperwork inserted after the deal was already done.

The third risk is the Section 453A pledging rule. Section 453A(d) generally treats certain loan proceeds as payments on an installment obligation when the obligation is pledged as security [8]. That matters because many aggressive structures try to monetize the note or the sale proceeds. If the seller borrows against the note or against funds tied to the buyer's cash, the deferral can be accelerated.

The fourth risk is economic substance. Section 7701(o) requires a transaction to meaningfully change the taxpayer's economic position, apart from federal income tax effects, and to have a substantial non-tax purpose where the doctrine is relevant [9]. A trust structure whose only meaningful purpose is converting a cash sale into tax deferral is exposed.

The fifth risk is ordinary tax friction. The note needs adequate interest under the imputed-interest rules. Depreciation recapture may be recognized in the year of sale even when appreciation is deferred. Publicly traded securities and inventory do not fit the basic installment-sale framework the same way capital assets or certain real property may [1]. State tax may not follow the federal answer. None of those issues are dramatic, but any one of them can change the after-tax result materially.

The cleanest way to understand the risk is to compare two outcomes. In the intended outcome, the seller reports gain as installment principal is received. In the failed outcome, the IRS collapses the transaction and the seller recognizes the gain in the year of sale, plus interest and potential penalties.

Let's use the same $10 million sale with $2 million basis. If the transaction is respected and the note pays level principal over 10 years, $800,000 of gain is recognized each year before interest income and other adjustments. At 23.8 percent federal tax, that is about $190,400 of federal tax per year on the gain component. If the transaction is collapsed, the full $8 million gain may be recognized in the sale year, creating about $1.904 million of federal tax at the same rate.

The total federal capital-gain tax is the same in the simple example. The difference is timing, audit exposure, professional fees, and penalty risk. If the seller used the tax deferral to reinvest the gross proceeds, then later loses the deferral, the cash call can arrive at exactly the wrong time.

That is the part clients need to understand before signing. The risk is not just "the IRS might disagree." The risk is that the tax bill can be pulled forward after the seller has already changed their liquidity, portfolio, and estate plan around the assumed deferral.

Figure 2: Illustration using a $10 million sale price and $2 million basis. If respected, the $8 million gain is recognized over 10 years; if collapsed, the gain may be pulled into the sale year.

The first question is whether there is already a buyer. If the seller has already negotiated the sale terms with a cash buyer before the trust enters the picture, the structure begins in a weaker position. Timing is not everything, but it is one of the facts the IRS will care about.

The second question is whether the trust is truly independent. The seller should not be able to direct investments, demand principal, substitute assets, force trustee decisions, or use the trust as a personal liquidity pool. The more control the seller keeps, the less the trust looks like an independent buyer.

The third question is whether the seller is receiving, borrowing, pledging, or indirectly accessing the buyer's cash. This is the bright red line in the IRS's monetized installment sale guidance. A structure that gives the seller most of the sale proceeds up front while claiming installment deferral deserves a much higher level of skepticism.

The fourth question is whether the economics work without the tax result. If the only reason to do the transaction is federal tax deferral, that is not enough of a planning thesis for me. A credible structure needs real non-tax reasons: payment design, creditor protection considerations, negotiated buyer limitations, estate liquidity, charitable coordination, or other facts that hold up when the tax result is removed from the page.

The fifth question is who is giving the advice. I would want an independent tax attorney and CPA who are not compensated by the trust promoter, trustee, investment manager, or closing provider. The opinion should address the exact documents, the exact buyer timeline, the exact note terms, the trust's tax status, imputed interest, Section 453A, state tax, depreciation recapture, and reporting obligations. A generic memo is not enough.

Figure 3: Practical diligence red flags to resolve before closing. The highest-risk facts are seller control over cash or investment decisions, borrowing against the economics, and tax-only purpose.

There are cleaner ways to handle many sale-of-asset tax problems. A direct installment sale to a creditworthy buyer is usually easier to analyze. A Section 1031 exchange may fit certain real-estate facts. Charitable remainder trusts, donor-advised fund gifts of appreciated property, opportunity zone investments, QSBS planning, and pre-sale estate planning may all be relevant depending on the asset and timeline. None are universal answers, and each has its own rules. But at least the risk can be named and modeled.

With Deferred Sales Trusts, I start with the opposite assumption from the sales pitch. I assume the IRS may ask whether the trust was a real buyer, whether the seller had control or economic benefit, whether the buyer was already identified, whether the proceeds were monetized, and whether the transaction had substance beyond tax deferral. Only after those questions are answered would I model the tax savings.

That is not because tax deferral is bad. Deferral can be valuable. It is because a sale transaction is usually a one-shot event. Once the purchase agreement is signed and the asset is gone, most of the planning leverage is gone with it. The structure has to be right before closing.

The Section 453 installment method is a real planning tool. A Deferred Sales Trust is a more fragile structure built on top of that tool. When it works, the seller may spread gain recognition over time. When it fails, the IRS can treat the seller as having sold directly to the buyer for cash, accelerating the gain and adding interest, penalties, and professional costs.

For clients, the practical rule is simple: do not evaluate a Deferred Sales Trust by the size of the promised tax deferral. Evaluate it by the strength of the facts if the IRS ignores the label and follows the money. Who controlled the buyer relationship? Who owned the asset? Who controlled the cash? Was there borrowing? Was the trust independent? Did the transaction have a non-tax purpose? Those are the questions that decide whether the planning has a foundation.

This piece is educational. The specifics of any sale, installment note, trust structure, or tax-deferral strategy require a conversation with your attorney, your CPA, and Perissos before acting.

All my best,

Brandon VanLandingham, CFA, CMT, CFP

Founder / CIO

[1] IRS Publication 537 (2025), Installment Sales, https://www.irs.gov/publications/p537.

[2] IRS Topic No. 409, Capital Gains and Losses, https://www.irs.gov/taxtopics/tc409.

[3] IRS Topic No. 559, Net Investment Income Tax, https://www.irs.gov/taxtopics/tc559.

[4] IRS Chief Counsel Advice 202118016, Monetized Installment Sale Analysis, https://www.irs.gov/pub/irs-wd/202118016.pdf.

[5] REG-109348-22, Identification of Monetized Installment Sale Transactions as Listed Transactions, Internal Revenue Bulletin 2023-35, https://www.irs.gov/irb/2023-35_IRB.

[6] Office of Information and Regulatory Affairs, RIN 1545-BQ69, Identification of Monetized Installment Sale Transactions as Listed Transactions, Spring 2025 regulatory agenda entry, https://www.reginfo.gov/public/do/eAgendaViewRule?RIN=1545-BQ69&pubId=202504.

[7] IRS News Release IR-2023-65, Dirty Dozen: Watch out for schemes aimed at high-income filers; Charitable Remainder Annuity Trusts, monetized installment sales carry risk, March 31, 2023, https://content.govdelivery.com/accounts/USIRS/bulletins/35234e2.

[8] 26 U.S.C. Section 453A(d), https://www.law.cornell.edu/uscode/text/26/453A.

[9] 26 U.S.C. Section 7701(o), https://www.law.cornell.edu/uscode/text/26/7701.

This piece is educational. It is not legal, tax, or accounting advice and is not a recommendation to take or refrain from any specific action. Tax law is fact-specific and changes regularly. Please coordinate any decisions discussed here with your attorney, your CPA, and Perissos before acting.

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