Charitable Remainder Trust vs. Installment Sale

Both let you sell an appreciated asset without paying the entire capital-gains bill in one year. Both pay you over time. They are not substitutes, because at the end of a CRT whatever is left belongs to charity, and at the end of an installment sale it belongs to you or your heirs.

How each one works

Charitable remainder trust (CRT). You irrevocably transfer the asset to a trust before it sells. The trust — a tax-exempt entity under §664 — sells it and pays no immediate tax on the gain. It then pays you an annuity (CRAT) or a percentage of its value each year (CRUT) for life or up to 20 years. When the term ends, the remainder passes to the charity you named. You get a current income-tax deduction for the present value of that remainder, which must be at least 10% of what you put in.

Installment sale under §453. You sell normally, but the purchase agreement provides that you are paid over time rather than all at once. You report gain only as payments arrive. In a structured installment sale the buyer still pays all cash at closing and the payment obligation is assigned to a highly rated life insurance carrier, so you are not depending on the buyer's credit for twenty years. The principal remains yours, and passes to your heirs.

Side by side

The deduction is smaller than it sounds

The headline attraction of a CRT is an immediate charitable deduction. It is real, but it is not a percentage of the asset — it is the present value of the remainder interest, computed with the §7520 rate, your age, and the payout percentage.

Take a $2,000,000 asset into a 5% CRUT for a 65-year-old. The remainder value is often in the range of 25–35% of the contribution, so the deduction is roughly $500,000–$700,000 — not $2,000,000. At a 37% marginal rate that is $185,000–$260,000 of tax saved on paper — though a gift of appreciated long-term capital gain property to a public charity is capped at 30% of AGI a year under §170(b)(1)(C), with a five-year carryforward, so most sellers cannot use it all at once. Against giving away $2,000,000 of principal.

That is a good trade if you were going to give it away anyway. It is a poor trade if the charity is a means of getting a deduction.

The ordering rule most people miss

Distributions from a CRT are not taxed proportionally. §664(b) applies a worst-first tier system: every distribution is treated as ordinary income until the trust's ordinary income is exhausted, then capital gain, then tax-exempt income, then principal.

In practice, a CRT funded with a highly appreciated asset pays out capital gain for many years before anything better. The deferral is real, but the character of the income coming back to you is usually worse than people expect — and if the trust generates any ordinary income, that comes out first.

An installment sale uses the gross profit ratio instead. Every payment is part return of basis and part gain, in the same proportion, for the entire term. It is a flatter, more predictable outcome.

What decides it

Choose the CRT if: you have charitable intent you would act on regardless · you want a deduction this year to offset other income · you want the asset out of your taxable estate · you are comfortable that the remainder is gone permanently.

Choose the installment sale if: you want the principal to stay with your family · the asset is mortgaged · you want the option to change your mind before closing · you do not want an irrevocable trust, a trustee, or an annual Form 5227 · you want a term you control rather than a life interest.

Choose neither if you are buying another property. A 1031 exchange defers the entire gain, keeps you invested, and steps up at death. It beats both.

One thing an installment sale does badly

An installment obligation is income in respect of a decedent under §691. If you die holding it, your heirs receive no step-up in basis — they inherit the remaining payments and the tax on them. A CRT does not have this problem, because the remainder simply goes to charity.

This is a real weakness and it is worth planning around rather than ignoring. The usual answer is life insurance sized to the deferred tax, funded from the payment stream itself — which is also, incidentally, what a wealth-replacement trust does inside a CRT plan. Either way, if you are over 70 and structuring a large gain, ask what happens at death before you sign anything.

Run the comparison on your own numbers

The calculator at goldsteinco.net/demo takes your sale price, what you paid, your other income, your state and the number of years, and shows what you keep under each path — including the three separate layers of a real-estate gain that most comparisons ignore.

Frequently asked

Q: Which saves more tax, a charitable remainder trust or an installment sale? A: On the tax alone a CRT usually wins, because the trust pays no tax on the sale and you receive a current deduction. But the CRT gives away the remainder permanently. Measured on what you and your family keep, the installment sale almost always wins unless you had genuine charitable intent.

Q: Can I get my money back out of a charitable remainder trust? A: No. A CRT is irrevocable. You receive the income stream you selected, and the remainder goes to charity at the end of the term. You cannot borrow from it or unwind it.

Q: How much is the charitable deduction for a CRT? A: It is the present value of the remainder interest, calculated with the §7520 rate, the term or your life expectancy, and the payout rate. It must be at least 10% of the contribution for the trust to qualify. For a typical 5% lifetime CRUT at age 65 it commonly falls between 25% and 35% of the amount contributed.

Q: Can you put mortgaged real estate into a CRT? A: It is generally a bad idea. Debt-encumbered property can create unrelated business taxable income for the trust and raise self-dealing issues under §4941. An installment sale handles debt more cleanly, though debt above your basis is still treated as a payment in the year of sale.

Q: Does a CRT avoid depreciation recapture? A: No, but it does not disappear either. §1245(b)(1) says the recapture rule does not apply to a disposition by gift, so contributing the property triggers nothing — instead §170(e)(1)(A) cuts your charitable deduction by the ordinary income you would have recognized, and when the trust sells, the recapture becomes trust ordinary income that comes back to you first under the §664(b) ordering. You recognize recapture yourself only on the bargain-sale portion when the property carries debt.

Q: Which is better for my heirs? A: The installment sale, with one caveat. The principal stays in the family, but the remaining obligation is income in respect of a decedent under §691 and receives no basis step-up. A CRT removes the asset from your estate but leaves your heirs nothing of it.

Q: Can I do a 1031 exchange instead? A: If you plan to keep owning real estate, yes, and it is usually the better answer — full deferral, continued ownership, and a step-up at death. A CRT or an installment sale is for the seller who is exiting, not trading.

Q: What is the annual cost of a charitable remainder trust? A: Legal drafting at the outset, then trustee fees — often around 1% of assets a year — plus an annual Form 5227 filing. An installment sale has no entity, no trustee and no annual return.

Related

• What is a charitable remainder trust? — the plain-English version, if you are still deciding whether a CRT fits at all
• CRT calculator — run the remainder your heirs give up against a §453 payout
• Structured installment sale — how the §453 side works when a life carrier funds the payments
• Depreciation recapture — the piece of the gain neither structure fully escapes
• Income in respect of a decedent — why an installment note gets no basis step-up at death