Deferred Sales Trust: How It Works, and What It Costs You
A Deferred Sales Trust is a way to sell an appreciated asset without paying the capital gains tax in the year of sale. Instead of selling to your buyer directly, you sell to a trust, the trust sells to the buyer, and the trust pays you over time. Because you never had constructive receipt of the cash, the gain is reported as the installments arrive.
That is the pitch. It is also the part everyone gets right. What follows is the part that decides whether it is the correct instrument for your sale.
What is the tax bill on your sale going to be?
Send me the sale price and rough basis. Within one business day I'll email you the actual number and the Seller's Guide to §453. If it doesn't fit your deal, I'll tell you that plainly.
No retainer · no obligation. Hans Goldstein, a licensed insurance agent (CA Insurance License #4273294), will contact you and may discuss insurance products, including annuities.
Illustrative only, not tax advice. Bring the numbers to your CPA, or send them the §453 guide built for accountants.
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
Hans Goldstein · 213-414-2808 · Hans Goldstein: Tax & Exit Planning · This is an educational conversation, not tax advice. Bring your CPA in before you file.
Hans Goldstein, a licensed insurance agent (CA Insurance License #4273294), will contact you and may discuss insurance products, including annuities.
Go deeper: deferred sales trust pros, cons and problems on Big Sale Tax.
How the deferral actually works
The mechanism is IRC §453, the installment sale rules. I say that plainly because it is the same section of code behind a structured installment sale. The Deferred Sales Trust is not a separate tax provision. It is a structure built on top of §453, using a third-party trust as the intermediate buyer.
- You transfer the asset to an irrevocable trust in exchange for an installment note.
- The trust sells the asset to your buyer, usually for the same price, so the trust recognizes little or no gain.
- The trust invests the proceeds and pays you under the note.
- You report gain as principal is received, spreading the tax across the note term.
The deferral is real. The questions are who holds your money while it defers, what it is invested in, and what happens if the IRS disagrees with the structure.
Where it gets risky
It is a promoted structure, not a statutory one. There is no Revenue Ruling that approves the Deferred Sales Trust by name. Practitioners rely on private letter rulings issued to other taxpayers, which by statute cannot be cited as precedent, and on general §453 authority.
Constructive receipt and economic benefit. If you retain too much control over the trust or its investments, the IRS can argue you had the benefit of the money all along and tax the entire gain in year one, with interest and penalties.
Your principal is invested at market risk. In most deferred sales trust arrangements the trust puts the proceeds into securities. If the portfolio falls, the note payments still have to come from somewhere. You deferred the tax and took on investment risk you may not have wanted.
Cost and complexity. Setup fees, trustee fees, and ongoing management come out of the same principal you were trying to protect. Over a long note those fees compound against you.
We wrote about each of these separately: the main deferred sales trust risks, audit risk, deferred sales trust fees, the sham trust doctrine, and the deferred sales trust IRS ruling question.
Deferred Sales Trust fees: what you pay
A deferred sales trust is not free because the fees come out of the trust rather than your pocket. The fee stack usually has four parts:
Because the annual fees are charged on the whole deferred balance for the life of the note, they compound: a fee of 1% to 2% a year on a 10-year note can consume a large share of the tax you deferred. Ask for every fee in writing, as a dollar figure over the full term, before you sign. Deferred sales trust trustee fees, with a 10-year worked example.
Has the IRS ruled on Deferred Sales Trusts?
No. There is no revenue ruling, revenue procedure or regulation approving or banning the deferred sales trust by name. Private letter rulings that promoters cite were issued to other taxpayers and cannot be relied on as precedent. The IRS evaluates each deferred sales trust under the ordinary installment-sale and trust doctrines. More: is a Deferred Sales Trust legal, and what the IRS has said.
The alternative most sellers end up choosing
A structured installment sale uses the same §453 deferral, but the periodic payments are funded through a life insurance company annuity rather than a trust-managed portfolio.
The trade is straightforward. The trust offers upside and flexibility, with market risk and a structure the IRS has never formally approved. The carrier-funded route gives you a fixed schedule set in the contract and a filing position that does not need defending.
Neither is right for everyone. If you want equity exposure on the deferred principal and you accept the audit posture, a deferred sales trust can make sense. If you are selling once, near retirement, and what you actually want is the tax spread and a predictable income stream, the structured installment sale does that with less that can go wrong.
What about a 1031 exchange?
A 1031 exchange defers gain only if you buy more real estate, inside 45 and 180-day clocks. It works well if you want to keep owning property. Both options above exist for the seller who is done owning property and wants out. See 1031 exchange alternatives and deferral options compared.
Run your own numbers
Put your sale price and basis into the calculator above and switch between the tabs. It shows the tax you would pay at closing, what a 1031 defers, what a deferred sales trust defers, and what the §453 route pays out. It uses real 2026 federal and state brackets, unrecaptured §1250 gain at up to 25%, and the 3.8% net investment income tax.
Illustrative only, not tax advice. Bring the numbers to your CPA, or send them the §453 guide built for accountants.
Frequently asked
Q: How much does a Deferred Sales Trust cost? A: Expect a setup or structuring fee at closing plus annual trustee and investment management fees charged on the deferred balance, and legal and trust accounting costs. The annual fees run for the life of the note, so get the total in dollars over the full term before you commit.
Q: Is a Deferred Sales Trust approved by the IRS? A: No. The IRS has issued no published ruling approving or prohibiting the deferred sales trust by name. It relies on the general installment-sale rules of IRC §453, and each arrangement is judged on its own facts.
Q: What happens if the deferred sales trust's investments lose money? A: The note payments to you depend on what the trust holds. If the portfolio falls, there is less to pay you, and the tax you deferred is still owed as payments are received.
Q: Is a Deferred Sales Trust the same as a Delaware Statutory Trust? A: No. They share the same initials, but a Delaware Statutory Trust is a fractional real estate ownership vehicle used as 1031 exchange replacement property. A Deferred Sales Trust is an installment-sale structure for sellers who want out of the asset.
Sources: 26 U.S.C. §453 (Cornell LII), IRS Publication 537, 26 U.S.C. §6110(k)(3).
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
Hans Goldstein · 213-414-2808 · Hans Goldstein: Tax & Exit Planning · This is an educational conversation, not tax advice. Bring your CPA in before you file.
Hans Goldstein, a licensed insurance agent (CA Insurance License #4273294), will contact you and may discuss insurance products, including annuities.
Run your specific numbers
The calculator runs your sale through real 2026 federal + state tax brackets and shows §453 savings vs lump sum side-by-side.
Run the calculator → 213-414-2808