Section 453, the Installment Sale, and the "453 Trust"

Section 453, the Installment Sale, and the "453 Trust"

A $25 million example, and the line between a real installment sale and a marketed structure

April 25, 2026

There aren't many transactions that change a family's financial picture as quickly as the sale of a business. For a founder-operator, the proceeds of a single closing can represent decades of work compressed into a few wire transfers. The decisions around how that sale is structured --- and when each dollar of tax actually comes due --- can move the after-tax outcome by millions.

One of the most common questions I get from business owners is whether they should "do an installment sale" or use a "453 Trust." Those two phrases sound similar, and promoters often blur the line between them on purpose. They are not the same thing. A traditional installment sale under Internal Revenue Code §453 is a well-worn provision of the tax code that Congress simplified in 1980 [1][2]. A "453 Trust," "Deferred Sales Trust," or "Monetized Installment Sale" is a marketed structure built on top of §453, and one the IRS has flagged repeatedly --- including in proposed regulations published in 2023 --- as abusive when it lacks economic substance [3][4].

This piece walks through how the basic installment method works, where the deferral benefit actually comes from, where Congress decided to claw part of that benefit back through §453A, and what to be careful of when the same word --- "453" --- gets used to sell something very different. The example throughout is an owner selling a business for $25 million.

The installment-sale rules have been around in some form for almost a century. The framework most practitioners think of today traces to the Installment Sales Revision Act of 1980 (Public Law 96-471), which Congress passed to simplify the prior framework [2]. Before 1980, sellers had to keep first-year payments below 30 percent of the contract price to qualify for installment treatment --- a brittle test that produced a lot of deals structured around mechanics rather than economics. The 1980 act eliminated that 30 percent ceiling and made the installment method the default treatment for any qualifying installment sale, with an option to elect out [1][2].

The point of §453 is to match tax to cash. If a seller takes back a note instead of receiving the full purchase price at closing, the law lets the seller pay tax on the gain as the cash actually arrives. It's a sensible idea --- one many sellers have used quietly since the Reagan administration without anyone calling it a "strategy."

What changed is what happened next. As deals got bigger and structures got cleverer through the 1980s, Congress decided that very large deferred installment notes deserved an interest charge to neutralize part of the deferral benefit. That charge lives in §453A and is the wrinkle that catches most $25 million sellers off guard.

An installment sale, in plain language, is any sale where the seller receives at least one payment after the year of closing [1]. The buyer's promise to pay the rest can take many forms --- a promissory note, a mortgage, a deed of trust, a land contract --- but the structure is the same: cash now plus a stream of future payments.

The mechanics are simple. The seller computes a "gross profit percentage," equal to the gross profit on the sale divided by the contract price [1]. Each principal payment received is then split: the part equal to the gross profit percentage is taxable gain that year, and the remainder is a tax-free recovery of basis. If the gross profit percentage is 90 percent, then 90 cents of every principal dollar received is taxable gain, and 10 cents is basis recovery. The interest portion of the buyer's payment --- separately stated --- is taxed as ordinary interest income, the same way a bond coupon would be taxed.

A few things cannot ride on the installment method even if the buyer pays over time. Inventory, dealer property, and stock or securities traded on an established securities market are excluded [1]. Sales at a loss don't qualify either. And depreciation recapture --- the part of the gain that represents prior depreciation deductions on equipment, real property improvements, or §1245 assets --- has to be reported in the year of sale, whether or not the seller has received cash for it [1]. That last rule catches more business sellers than any other: the recapture income is "phantom" cash-tax in year one even on an otherwise-deferred deal.

A seller can also elect out of the installment method by reporting the entire gain on Form 8949 or Form 4797 in the year of sale [1]. The election is made by the original return due date, with an automatic six-month extension via amended return. Sellers sometimes elect out because they have offsetting losses available, or because they expect tax rates to rise meaningfully in future years and would rather lock in the current rate.

Let's walk through a concrete example. Picture a founder selling her business for $25 million. Her cost basis is $2.5 million, so the gain is $22.5 million, and the gross profit percentage is 90 percent. She is married, files jointly, and her income is high enough that every dollar of long-term capital gain hits the top federal bracket. For 2025 returns, that means a 20 percent long-term capital gains rate (the top bracket starts at $600,050 of taxable income for joint filers) plus the 3.8 percent Net Investment Income Tax (which kicks in at $250,000 of modified adjusted gross income for joint filers) [5][6]. Her all-in federal capital-gains rate is 23.8 percent.

If she takes all $25 million in cash at closing, her federal tax on the gain is $22.5 million × 23.8 percent, or roughly $5.36 million, all due in the year of sale.

Now suppose instead she takes $2.5 million in cash at closing and a $22.5 million promissory note from the buyer payable in nine equal annual installments of $2.5 million, plus interest. (For simplicity, set aside any depreciation recapture for the moment --- if the business owns substantial depreciable property, that piece accelerates regardless.) Each $2.5 million principal payment generates $2.25 million of long-term capital gain (90 percent of the payment), which produces about $535,500 of federal capital-gains tax that year. The interest portion of each payment is taxed at ordinary rates. The total federal capital-gains tax over the ten-year life of the note still adds up to $5.36 million --- the installment method does not change the total, only the timing.

Figure 1 shows the cash-tax timing of the two paths side by side. The lump-sum bar is one tall column in year zero. The installment bars are ten short columns spread across a decade. Both paths sum to the same total federal capital-gains tax. The economic question is what the time value of that deferral is worth, and what risks come with it.

Figure 1: Federal capital-gains tax timing on a $25 million sale --- lump-sum payment in year zero versus a level ten-year installment note. Both paths produce the same total federal capital-gains tax of roughly $5.36 million.

This is where most sellers of $25 million businesses run into a rule they've never heard of. Section 453A was added in 1987 to neutralize part of the deferral benefit on large installment notes. It applies to any non-dealer installment obligation arising in a taxable year if the face amount of all such obligations outstanding at the close of that year exceeds $5 million [3][7].

The mechanics work like this. First, the law computes an "applicable percentage" equal to the portion of the year-end face amount of the obligations in excess of $5 million, divided by the full face amount [3]. In our example, the seller's note has a face amount of $22.5 million at the end of year one, so the applicable percentage is ($22.5M - $5M) / $22.5M, or roughly 77.78 percent. Second, the law computes a "deferred tax liability" equal to the seller's unrecognized gain at year-end, multiplied by the maximum applicable rate [3]. Third, the IRS charges interest on the applicable-percentage portion of that deferred tax at the §6621(a)(2) underpayment rate, which is 7 percent for the first quarter of 2026 [8]. The §453A rate floats with each calendar quarter.

For our seller, that produces an annual §453A interest charge in the neighborhood of $260,000 in year one, falling each year as the note amortizes. Figure 2 traces the year-by-year drag. Cumulatively, over the life of a level ten-year note at the rates currently in effect, §453A interest costs roughly $1.0 to $1.3 million on a $25 million sale --- meaningful, though softened somewhat because the §453A interest is generally deductible as investment interest expense, subject to the §163(d) limitations.

The takeaway is not "don't use the installment method." It's that the government has already priced the deferral. For deals where the face amount of the deferred note tops $5 million, simple "kick the tax can down the road" arbitrage isn't really arbitrage. The reasons to use an installment sale at this size are non-tax reasons: smoothing year-to-year income (especially if the seller has charitable plans, large Roth conversions, or other variable items in future years), providing buyer financing in a deal that wouldn't otherwise close, transferring concentration risk over time, or planning around an estate-tax event during the note period.

Figure 2: Illustrative annual §453A interest charge on the $22.5 million deferred note. Applicable percentage of 77.78% is fixed in the year of sale; rate held at 7% for illustration (the §6621(a)(2) underpayment rate floats quarterly).

Now we get to where the marketing gets aggressive. The pitch usually arrives a few months before a planned sale, and it often comes with a brochure that uses the words "Section 453" repeatedly and prominently. The structure goes by various names: "Deferred Sales Trust," "453 Trust," "Monetized Installment Sale." The pitch is some version of: don't worry about §453A or the deferral economics --- transfer your business to a special trust before the sale, the trust sells it, you get cash equivalent up front through a "loan," and the trust pays you back over twenty or thirty years on a long note. The promoter typically claims the seller defers tax until the note payments are received, which can be decades.

The IRS does not view these structures the way the promoters do. In August 2023, the IRS published proposed regulations (REG-109348-22) that would identify monetized installment sale transactions and substantially similar transactions as listed transactions, requiring disclosure by both participants and material advisors and exposing them to penalties for failure to disclose [4]. That came on top of monetized installment sales appearing on the IRS Dirty Dozen list of abusive transactions, and being among the matters under active review at the IRS Office of Promoter Investigations [9]. The agency's concern, in plain terms, is that the trust adds no real economic substance --- the seller in many of these structures has effectively received the proceeds at closing, just dressed up to look like something else. The IRS contests these structures for what they really are: a constructive sale, fully taxable in the year of the underlying business transaction, plus interest, plus penalties.

That doesn't mean every irrevocable trust used in a sale context is suspect. There are legitimate planning structures --- charitable remainder trusts, intentionally defective grantor trusts pre-funded for an installment sale, GRATs holding business interests pre-sale --- that have decades of statutory and regulatory backing. The line is whether the structure has economic substance independent of the tax outcome and whether the seller has retained a real risk-bearing position. A "453 Trust" pitched as a way to put the proceeds in your hand on closing day, without selling and without paying tax, is not a real installment sale. It is the kind of structure that ends with a Tax Court docket number, plus the original tax bill, plus interest, plus penalties.

I tell prospects this analogy: a real installment sale is the financial-planning equivalent of carrying a mortgage for someone you trust. They get the keys, you get a note, and you both agreed to wait for the rest. A "453 Trust" pitched the way most are pitched is closer to selling the house and then claiming you didn't because the cash went into a friend's account first. The tax law cares about the substance, not the choreography.

There are real situations where a basic §453 installment sale is the right answer. A buyer who can't get full bank financing but is otherwise creditworthy may be willing to pay a meaningfully higher headline price in exchange for seller financing. A seller who has a big charitable deduction lined up over the next several years may be able to use an installment sale to time gain recognition into the years the deductions land. A seller whose income is otherwise low between the sale and Social Security claiming may benefit from spreading the gain across multiple years to dodge IRMAA cliffs and keep more of the gain in the 15 percent bracket. And in family transitions, an installment sale can provide a vehicle for transferring a business to the next generation while documenting fair value and supporting the seller's retirement income.

There are also situations where I would not use it. If the buyer's credit is anything but rock solid, the seller is taking on default risk that may dwarf any deferral benefit. If the seller expects federal capital-gains rates to rise materially within the note period, locking in today's rates by electing out and paying the tax now may be the better call. If the deal involves substantial depreciation recapture, that recapture is a year-one cash-tax event regardless [1], so the optics of "deferring" the deal are partly fictional. And if the seller's true objective is to generate cash for diversification on closing day, a deferred-payment structure isn't fitting the goal --- it's contradicting it.

At Perissos, our planning view on a business sale is the same as our planning view on every other large decision: plan first, product second. We start with the seller's goals --- liquidity, cash-flow needs, family transitions, charitable intent, the timing of other planning levers --- and only then layer in structure. Tax savings are an output of a good plan, not the input. We do not lead with installment sales, and we do not lead with trusts. We lead with the question of what the seller actually wants the next ten years to look like.

When an installment sale fits, we coordinate with the seller's M&A attorney, CPA, and (where relevant) estate-planning attorney from the term-sheet stage. We model the §453A interest charge across plausible interest-rate paths so the seller sees the real after-tax curve, not a marketing version of it. We test the buyer's credit and the security package on the note. We coordinate the gain recognition across the seller's existing tax picture --- charitable plans, Roth conversion timing, IRMAA tiers, NIIT positioning. And we document the path so the family and the next generation of advisors can reproduce the reasoning later.

When somebody else has already pitched the seller a "453 Trust" or a "Monetized Installment Sale," we walk through the IRS's actual position, the listed-transaction proposal, the constructive-receipt risk, and what a Tax Court fight would look like. Most prospects don't need a sales pitch to walk away after that conversation. The real installment sale was always available to them. They just didn't need the brochure.

The installment sale is a legitimate, time-tested tool. It can do real work for a $25 million seller --- spreading income, financing a buyer, smoothing out an otherwise bunched tax year. But it isn't free, and §453A makes sure of that for any deferred note above $5 million. The arithmetic deserves to be done with real numbers and a real model, not a brochure.

The "453 Trust" pitched by promoters is a different animal. It borrows the §453 name, but the IRS has been clear that the structure --- as commonly marketed --- is not a real installment sale. The seller usually ends up worse than if they had simply paid the tax, taken the cash, and moved on with a diversified portfolio.

Selling a business should be one of the most carefully planned events of a family's financial life. Our team will continue working alongside the attorneys and CPAs who serve our clients to make sure the structure fits the goals, the math is honest, and the reasoning is durable. If you are thinking about a sale --- now or in the next few years --- the right time to bring us in is well before the term sheet, not after.

This piece is educational. The specifics of any business sale, including which structure makes sense and how to coordinate it across federal and state tax rules, require a conversation with your attorney, your CPA, and Perissos.

All my best,

Brandon VanLandingham, CFA, CMT, CFP

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

[2] Public Law 96-471, Installment Sales Revision Act of 1980 (Oct. 19, 1980), https://www.congress.gov/96/statute/STATUTE-94/STATUTE-94-Pg2247.pdf.

[3] IRC §453A; IRS LB&I Process Unit, Interest on Deferred Tax Liability, https://www.irs.gov/pub/fatca/int_practice_units/interest-on-deferred-tax-liability.pdf.

[4] Identification of Monetized Installment Sale Transactions as Listed Transactions, REG-109348-22, 88 Fed. Reg. 52,500 (Aug. 4, 2023), https://www.federalregister.gov/documents/2023/08/04/2023-16650/identification-of-monetized-installment-sale-transactions-as-listed-transactions.

[5] Rev. Proc. 2024-40, 2025 inflation adjustments (long-term capital gains rate breakpoints for 2025), via Tax Foundation summary, https://taxfoundation.org/data/all/federal/2025-tax-brackets/.

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

[7] LB&I Concept Unit, Installment Method (UIL 453.10-00), https://www.irs.gov/pub/fatca/int_practice_units/cor_c_005.pdf.

[8] Rev. Rul. 2025-22, Section 6621 Determination of Rate of Interest (first quarter 2026 underpayment rate of 7 percent), https://www.irs.gov/pub/irs-drop/rr-25-22.pdf.

[9] IRS Newsroom, Dirty Dozen abusive transactions (monetized installment sales identified), https://www.irs.gov/newsroom/dirty-dozen.

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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