Deferred Sales Trust: How It Works, the Problems, and the Alternatives

By Hans Goldstein, EA · Updated October 15, 2026

Run your sale four ways

Enter your sale price and basis. The calculator compares paying the tax now, a 1031 exchange, a deferred sales trust, and a charitable trust. It uses 2026 brackets and the state you pick. It is a model, not a quote; the assumptions are shown under it.

Illustrative only, not tax advice. Bring the numbers to your CPA, or send them the §453 guide built for accountants.

What a deferred sales trust is and how it works

A deferred sales trust is not a tax provision. It is a structure built on the ordinary installment method (IRC §453). Under §453 a seller who is paid over more than one year reports gain as payments arrive.

The trust adds a middle party so that the seller does not take the buyer’s money directly and the seller’s note is owed by the trust instead of the buyer. Steps, in the order promoters describe them:

1. Before you sign a binding contract with your buyer, you create an irrevocable trust with an independent trustee. You do not own it, serve as trustee, or benefit from its assets beyond the note (Kitces, May 29, 2024).
2. You sell the asset to the trust for a promissory note. The note states the principal, the interest rate and the schedule.
3. The trust sells the asset to your buyer, usually for the same price. Because the trust paid you with a note and sold for about what it paid, it recognizes little or no gain.
4. The trust holds the buyer’s cash and invests it, usually through a wealth manager chosen by the trustee.
5. The trust pays you interest and principal on the note over the term, such as 10 years. Each payment is part basis, part gain, part interest.
6. You report the gain on Form 6252 as principal is paid. The 3.8% net investment income tax and state tax still apply as gain is recognized.
7. When the note is paid, the trust ends.

Why people like it: the trust can take any appreciated asset (a business, stock, real estate, equipment), there are no 45-day or 180-day deadlines, you do not have to buy replacement property, and the trust’s investments are managed by someone else.

The question is who holds the money while the tax is spread, what it is invested in, and what happens if the trust cannot pay. That is where the problems start.

What a deferred sales trust costs

Cost is where the numbers get specific. Published estimates, dated:

What that means in dollars. Take the $3,000,000 example below: after $150,000 of selling costs, the trust holds $2,850,000 and pays you a 10-year level note at 5.0%. A fee of 1.0% a year on the beginning balance totals about $168,000 over the term; at 1.5% it is about $252,000.

Add the $15,000 to $45,000 setup fee and the total is roughly $183,000 to $297,000 (illustrative, October 15, 2026, a declining balance).

How to read that. The fees come out of the trust, not out of your note payments, so you keep receiving the agreed payments as long as the trust can make them.

But the trust has to earn the note rate plus the fee to stay whole: roughly 6.25% a year to pay a 5.0% note and a 1.25% fee.

If its portfolio earns less, the note is only paid from principal, and if the portfolio is depleted the trust, as Kitces notes, is not obligated to pay more than it holds.

Compare that to a 1031 exchange, where a qualified intermediary typically charges a few thousand dollars in total; Phoenix Strategy Group cites $750 to $1,500 for a standard exchange.

More: deferred sales trust trustee fees, with a 10-year worked example.

Where the IRS stands

The facts, stated plainly:

• No ruling. There is no revenue ruling, regulation or published IRS guidance approving the deferred sales trust by name, and none banning it. The IRS tests each arrangement under the ordinary installment sale and trust rules. Providers say their clients’ returns have been audited without adverse findings; those results are private and bind no one else (Kitces).
• The independence question. The structure only works if you do not have the benefit of the money. If you control the trust, or the sale was already arranged before the trust took title, the IRS can argue you made the sale and had the money, which makes the whole gain taxable in the year of sale, with interest and penalties. Practitioners cited by Forbes (August 27, 2024) say a pre-arranged contract can cause that result.
• Related but different: monetized installment sales. A monetized installment sale adds a loan back to you from a lender tied to the promoter. The IRS placed those on its Dirty Dozen lists (2021 to 2023, per Freeman Law) and proposed regulations in August 2023 would make certain ones listed transactions (RSM). A deferred sales trust that does not lend you the money back is a different structure, but advisers note the two are often discussed together. More on monetized installment sales.
• Regulators. Kitces reports a 2020 filing by the Washington State Department of Financial Institutions against a deferred sales trust promoter for operating without registration and for implementing trusts without valid installment notes in place. That is one regulator’s action, not a ruling on the structure.

None of this says a deferred sales trust cannot work. It says the result depends on facts you do not control, in an area where there is no ruling to rely on. Further reading: is a deferred sales trust legal, audit risk and the sham trust doctrine.

The problems people raise

Each of these has an answer, but each is a question to ask before you sign.

The case for a deferred sales trust, stated fairly

• Any asset. A 1031 exchange only works for real property. A deferred sales trust can take a business, stock or equipment.
• No deadlines. No 45-day identification or 180-day closing window.
• No replacement property. You are not forced to buy into another building.
• Flexibility. The note schedule is negotiated, and the trust can reinvest proceeds in a diversified portfolio.
• Tax spread. Like any installment sale, the gain is recognized as principal arrives, which can keep each year’s income in lower brackets.
• Works with other tools. It can be a backup if a 1031 fails or be combined with other strategies.

Deferred sales trust vs an installment sale vs a Delaware statutory trust

These are the three routes people compare. “Installment sale” here means one in which the buyer pays the full price at closing, a separate company owes you the payments, and an insurer’s annuity funds them (a structured installment sale). A “Delaware statutory trust” here means a 1031 exchange into a fractional interest in a real estate trust (Rev. Rul. 2004-86).

See also deferred sales trust vs structured installment sale, the Delaware statutory trust explained, Delaware statutory trust lock-up vs a structured sale, why a structured installment sale is not a deferred sales trust and every option compared side by side.

The 1031 downside nobody mentions: suspended losses and carryforwards

A 1031 exchange is not a fully taxable disposition. Under IRC §469(g)(1), suspended passive activity losses are released only when all gain or loss on the disposition is recognized, so a 1031 leaves them suspended and they carry into the replacement property.

Capital loss carryforwards also go unused, because no gain is recognized to absorb them. A taxable sale releases suspended passive losses and lets carryforwards offset the gain. On an installment sale, §469(g)(3) releases the suspended losses each year in the same ratio that the gain recognized that year bears to the total gross profit.

That is one reason investors with large suspended losses sometimes use a taxable installment route, or a mix: part into a 1031 or Delaware statutory trust, part cash, part installment. Read using a 1031 exchange and an installment sale together and the problem with a 1031 exchange. This is a point to raise with your CPA with your own loss schedule in hand.

Worked example: a $3.0 million sale, dated October 15, 2026

A married couple in California sells a business-owned property for $3,000,000. Basis is $500,000 and selling costs are $150,000, so the gain is $2,350,000. Other income is $150,000 a year.

The engine compares a cash sale with the same sale paid over 10 years. Under §453 the tax result is the same whether the payments come from a deferred sales trust or an insurer-backed assignment company. The difference is who stands behind the payments and what it costs.

The trust and the insurer-backed route give the same tax profile. What differs is the risk you hold and the fees: with a trust, the payment is as good as the trust’s portfolio and trustee; with an annuity, it is as good as the insurer’s claims-paying ability.

In a 1031 exchange the tax is not spread at all. It is postponed until you sell the replacement property, and heirs can receive a step-up. The right choice depends on whether you want to keep owning real estate.

“Sell for less, net more”

Because less tax is paid in the first year, a seller can accept a lower price and end up even. In this example, a payout sale at about $2,567,984 nets the same present value after tax as the $3,000,000 cash sale, a gap of $432,016.

That is the break-even in the engine, not a promise. Try it on the sell for less, net more calculator, or use the buyer offer gap calculator if you represent a buyer.

Run on October 15, 2026 with the Goldstein & Co. engine: 2026 federal brackets, the 3.8% net investment income tax and AMT (IRS Rev. Proc. 2025-32), and 2026 state brackets. The 5.0% payout rate is an assumption, not a quote.

After-tax money at the end assumes nothing is spent and both paths earn 5.0%, taxed every year. Fee ranges are published estimates, not quotes from any provider. These are estimates, not a quote.

Who each route fits

1Deferred sales trust

• Fits when: you want market exposure on the deferred money, you can accept that no ruling approves the structure, you are comfortable with an independent trustee holding the assets, and you have the fees quoted in writing.
• Cost: setup of $15,000 to $45,000 plus 1.0% to 1.5% a year (published ranges).
• Watch for: trustee independence, timing before a binding contract, portfolio risk, a depleted trust that owes no more than it holds, and no basis step-up on the note.

2Installment sale with insurer-backed payments

• Fits when: you want a fixed income stream you can plan around, the buyer can pay in full at closing, and you would trade market upside for certainty.
• Cost: a $5,000 written analysis if you hire us; the first 15-minute scope call is free. On a funded structure the insurer pays a one-time commission of about 4% of the amount structured to the brokerage firm that places it (Hans’s share is about 2.4%, no trail), built into the annuity pricing, not a separate fee.
• Watch for: the schedule is fixed and cannot be sped up, you rely on the insurer’s claims-paying ability, the payout rate is set by annuity pricing, and it must be written into the sale contract before closing. No IRS ruling approves the assignment structure by name either, so have your CPA review it. See minimum sale size.

31031 exchange into a Delaware statutory trust

• Fits when: you are selling real estate, want to keep owning real estate without managing it, and want the chance of a basis step-up for heirs.
• Cost: a qualified intermediary fee plus sponsor fees and loads built into the offering. Read the offering memorandum.
• Watch for: the 45- and 180-day clocks, illiquidity, the sponsor’s control of the hold period, no release of suspended passive losses, unused capital loss carryforwards, and the deferred gain is still there when the trust sells.

4A cash sale

• Fits when: the gain is small, you need the money now, or you are in a low-income year.
• Cost: the full tax in the year of sale.
• Watch for: bracket jumps, the 3.8% surtax and state tax in one year.

Questions to ask any deferred sales trust provider

1. Who is the trustee, who chose them, and are they independent of the provider?
2. Show me every fee in dollars over the full term, including trustee, investment management, legal and tax.
3. What may the trust invest in, and what happens to my note if the portfolio falls 30%?
4. Am I a creditor of the trust with recourse, or only entitled to what it holds?
5. When must the trust be in place relative to my buyer’s contract?
6. Which tax professional, independent of you, will sign an opinion on my facts?
7. Which regulators oversee you? Are you a registered adviser?
8. How is the year-one tax computed on my recapture, and what is the §453A charge if my note is over $5,000,000?
9. What happens if I die with years left on the note?
10. What happens if the IRS challenges the structure? Who pays the defense, and is the full gain taxed in the first year?

Related: forced-to-sell step-by-step guides, deferred sales trust risks, promoter red flags and is a deferred sales trust safe.

Frequently asked questions about the deferred sales trust

What is a deferred sales trust?

A deferred sales trust is a private arrangement built on the installment sale rules. You sell an appreciated asset to an independent irrevocable trust in exchange for a promissory note. The trust sells the asset to your buyer, invests the cash, and pays you interest and principal over time. You report gain as principal is paid (IRC §453).

How does a deferred sales trust work?

You set up the trust before you have a binding sale contract, sell the asset to it for a note, and the trust sells to your buyer. The trust holds and invests the proceeds and pays you on the note schedule. Each payment is part return of basis, part gain, and part interest, and you pay tax as you receive them.

Is a deferred sales trust legal?

Yes, the installment sale rules are law, and a trust can be a party. But the IRS has not approved the deferred sales trust by name, so whether a particular one works depends on its facts, especially whether the trust is truly independent and the sale was not pre-arranged. Get a written opinion from an independent tax professional.

Is a deferred sales trust approved by the IRS?

No. There is no revenue ruling, regulation or published guidance approving or banning it by name. The IRS applies the ordinary installment sale and trust rules to each arrangement.

What are the problems with a deferred sales trust?

No IRS ruling, dependence on an independent trustee and an investment portfolio to pay the note, fees of 1.0% to 1.5% a year plus setup (published ranges), the risk of constructive receipt if you have too much control or the sale was pre-arranged, no basis step-up on the note at death, and a regulator’s attention to some providers. Each is covered in the table above.

What are the pros and cons of a deferred sales trust?

Pros: it works for any appreciated asset, has no 1031 deadlines, needs no replacement property, and spreads the tax like any installment sale. Cons: no IRS ruling, trustee and portfolio risk, ongoing fees, no early access to principal, and the unpaid gain passes to heirs without a step-up.

What are the disadvantages of a deferred sales trust?

The main disadvantages are the lack of an IRS ruling, the fees that come off the trust every year, the risk that the trust cannot pay the note if its investments fall, limited access to your money, and the need to have the trust in place before a binding sale contract.

How much does a deferred sales trust cost?

Published estimates are $15,000 to $45,000 to set up plus 1.0% to 1.5% of trust assets a year, with separate investment management fees. On a $2,850,000 trust paying a 10-year note at 5.0%, a 1.0% to 1.5% annual fee totals about $168,000 to $252,000 over the term, before setup.

Deferred sales trust vs 1031 exchange: which is better?

A 1031 exchange keeps your gain postponed if you buy replacement real estate within 45 and 180 days, and heirs can get a step-up. A deferred sales trust works for any asset and has no deadlines but depends on a trustee and has ongoing fees. The better choice depends on whether you want to keep owning real estate.

Deferred sales trust vs Delaware statutory trust: what is the difference?

A Delaware statutory trust is a way to complete a 1031 exchange: you exchange into a fractional interest in a trust-owned property pool (Rev. Rul. 2004-86). A deferred sales trust is an installment sale structure that holds your sale proceeds. They are unrelated structures with similar abbreviations, which is why this page spells both out.

Deferred sales trust vs installment sale: what is the difference?

In a traditional installment sale the buyer owes you the payments. In a deferred sales trust the trust owes you and invests the cash. In an insurer-backed installment sale the buyer pays in full at closing and a separate company, funded by an annuity, owes you. The tax method is the same; who owes you, the risk and the fees differ.

What is the alternative to a deferred sales trust?

The main alternatives are an installment sale where the buyer pays in full at closing and an insurer-backed assignment company owes you the payments, a 1031 exchange (including into a Delaware statutory trust) if you are selling real estate, a traditional installment sale where the buyer owes you, a charitable remainder trust, or paying the tax. Each has different risks.

Do suspended passive losses survive a deferred sales trust or a 1031 exchange?

A 1031 exchange is not a fully taxable disposition, so under IRC §469(g)(1) suspended passive losses are not released and carry into the replacement property, and capital loss carryforwards go unused. A taxable installment sale releases suspended losses as gain is recognized (§469(g)(3)) and lets carryforwards offset the gain.

What happens if a deferred sales trust loses money?

The trust owes the note, but per Kitces it is not obligated to pay more than its assets if investments fall. Read the trust document: whether you are a creditor with recourse or only entitled to what the trust holds is the key question.

What is constructive receipt in a deferred sales trust?

Constructive receipt means the IRS treats you as having received the sale money even though a trust holds it, because you control it or can get it on demand. If that applies, the whole gain is taxed in the year of sale. Independence of the trustee and no right to demand principal are what the structure relies on to avoid it.

Has the IRS audited deferred sales trusts?

Providers say clients have been audited without adverse findings. The IRS has not published a position on the structure. The IRS has publicly warned about a different arrangement, the monetized installment sale, which adds a loan back to the seller.

Is a deferred sales trust a scam?

Not by definition. It applies a real tax rule. But the lack of an IRS ruling, the control a trustee holds, the fees and the history of regulator action against some promoters are reasons to get an independent opinion and every fee in writing before you sign.

Who is a deferred sales trust for?

It is usually sold to sellers of a business, stock or real estate with a large taxable gain who want to spread the tax and have the proceeds invested. It fits best where the seller accepts portfolio risk and a structure without an IRS ruling. The setup cost ($15,000 to $45,000, published range) is hard to justify on a small gain.

Can I use a deferred sales trust after I have already sold?

Generally no. The trust must be in place before a binding sale contract, so that the trust, not you, makes the sale. If the sale has closed, the gain is already realized.

Do I still pay the 3.8% net investment income tax with a deferred sales trust?

Yes, as gain is recognized each year, along with state tax. Depreciation recapture on equipment is taxed in the year of sale, and unrecaptured §1250 gain is recognized first out of each payment, at up to 25% federal.

What happens to a deferred sales trust note when the owner dies?

The note passes to heirs. The unpaid gain is income in respect of a decedent, taxable to them as they receive it, with no basis step-up (IRC §691). This differs from a 1031 exchange, where heirs can receive a step-up on the replacement property (IRC §1014).

Is a deferred sales trust available in California?

The structure is not state-specific, and California generally follows the federal installment method. California-specific taxes still apply as gain is recognized (up to 13.3% on high incomes). Ask your provider how the state treats trust income.

Deferred sales trust IRC 453: how are they related?

IRC §453 is the installment sale rule: gain is reported as principal is received. A deferred sales trust relies on §453 by having the trust, not you, owe the note and hold the cash. The code section itself does not mention deferred sales trusts.

What does a real analysis cost?

The first 15-minute scope call is free. A written analysis is $5,000. The calculators and this page are free.

Sources and dates

• IRC §453, installment method, checked October 15, 2026
• IRC §453A, interest charge on installment obligations above $5,000,000, checked October 15, 2026
• IRC §469(g)(1) and (g)(3), release of suspended passive losses on a fully taxable disposition and on an installment sale, checked October 15, 2026
• IRC §1031, like-kind exchange of real property (45-day identification and 180-day closing in §1031(a)(3)), checked October 15, 2026
• IRS Rev. Rul. 2004-86, Delaware statutory trust interests treated as direct interests in real property for §1031, checked October 15, 2026
• IRC §691, income in respect of a decedent, checked October 15, 2026
• IRC §1014, basis of property acquired from a decedent, checked October 15, 2026
• Kitces.com, Ben Henry-Moreland, “Deferred sales trust”, May 29, 2024 (independence requirement, non-recourse payments, a 2020 Washington State DFI filing), checked October 15, 2026
• Forbes Finance Council, August 27, 2024 (trustee fees often about 1% to 1.5% of trust value), checked October 15, 2026
• Phoenix Strategy Group, deferred sales trust pros and cons (setup $15,000 to $45,000; annual trustee fee 1.0% to 1.5%), checked October 15, 2026
• Freeman Law, March 27, 2023, monetized installment sales on the IRS Dirty Dozen lists, checked October 15, 2026
• RSM, August 24, 2023, proposed regulations on monetized installment sales (listed transaction), checked October 15, 2026
• IRS Publication 537, Installment Sales, checked October 15, 2026
• IRS Rev. Proc. 2025-32, 2026 tax tables, checked October 15, 2026
• IRS quarterly interest rates, underpayment rate 7% for the fourth quarter of 2026, checked October 15, 2026

Who wrote this?

Find out what your sale is really going to cost you in tax, and what you can do about it

No retainer. On a funded structure, the insurer pays a one-time commission of about 4% of the amount structured to the brokerage firm that places it (Hans’s share is about 2.4%; no trail). It is built into the annuity pricing, not a separate fee.

Find out what your tax bill actually looks like before you sell, including the parts your CPA may not raise until the return is already being prepared.

Most people find out what they owe after the sale closes, when nothing can be changed. A short conversation now tells you the number, which layers apply to your situation, and which options are still open while the sale is still in front of you.

• What you will actually owe: federal, the 3.8% surtax, recapture and your state
• Which of those layers you can still do something about
• Whether spreading the sale changes the number in your case

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Go deeper: deferred sales trust pros, cons and problems on Big Sale Tax.