Charitable Remainder Trust vs Installment Sale Compared
A charitable remainder trust (CRT) and an installment sale both spread the tax on appreciated property over many years, but they end in different places. An installment sale keeps the unpaid note, and the family's inheritance, in your hands.
A CRT lets the trust sell your property with no tax at the sale, pays you an income stream for life or up to 20 years, and then gives everything that is left to charity.
Choose a CRT only if you actually want charity to get the remainder; otherwise an installment sale usually leaves your family more.
This page compares the two with a labeled simple example and lists the rules and traps. For the basic cash-now versus paid-over-time choice, see installment sale vs lump sum.
Go deeper: charitable remainder trust pros and cons, with a calculator, on Big Sale Tax.
How a charitable remainder trust works
- You transfer appreciated property, before any sale is binding, to an irrevocable CRT.
- The trustee sells it. The trust is exempt from income tax under §664(c), so the full price is reinvested.
- The trust pays you, and your spouse if you choose, either a fixed amount (a charitable remainder annuity trust, CRAT) or a fixed percentage of the trust's value each year (a charitable remainder unitrust, CRUT).
- The payout must be between 5% and 50%, for life or a term of up to 20 years (§664(d)).
- When the term ends, the remainder goes to the charity you named.
- You get an income tax charitable deduction in the year of the gift for the present value of the charity's remainder, subject to the §170 percentage limits.
Two qualification tests matter most:
| Test | Rule | Source |
|---|---|---|
| 10% remainder | Charity's remainder must be worth at least 10% of the property (CRAT: of the initial net value; CRUT: of each contribution when contributed) | §664(d)(1)(D), (d)(2)(D) |
| 5% probability (CRATs) | The IRS disallows the deduction for a CRAT if there is more than a 5% chance the trust runs dry before the charity gets anything | Rev. Rul. 77-374; Rev. Proc. 2016-42 offers a sample clause |
How CRT payments are taxed: the four tiers
You do not escape the gain. The trust's tax-free sale simply moves the gain into the trust's books, and it comes out to you with your payments under §664(b):
- Ordinary income the trust has earned (this year and undistributed prior years).
- Capital gain, including the gain from selling your property.
- Other income, such as tax-exempt interest.
- Return of principal (corpus), tax-free.
Because the gain from your sale sits in tier 2, most of your payments for many years are taxed as capital gain, much like installment payments. The difference is that you are taxed on distributions, not on a buyer's principal schedule, and the trust invests the full untaxed proceeds.
Simple example: $2,000,000 of land
Simple example. Assumptions: land worth $2,000,000, basis $400,000, gain $1,600,000, all long-term capital gain (no depreciation). Married filing jointly, $120,000 of other taxable income each year. 2026 federal brackets and 3.8% net investment income tax, computed with the §1(h)(1) ordering.
State tax, the charitable deduction and investment returns are ignored so the tax timing is easy to see. The CRUT pays 5% of an assumed $2,000,000 value, all characterized as tier-2 capital gain. The installment sale is a 20-year note with equal principal and interest ignored.
| Cash sale | 20-year installment sale | 5% CRUT | |
|---|---|---|---|
| Gain taxed in year one | $1,600,000 | $80,000 | $100,000 distributed |
| Federal tax that year | $295,315 | $12,000 | $15,000 |
| Net investment income tax | $55,860 | $0 | $0 |
| Year-one tax | $351,175 | $12,000 | $15,000 |
| Who gets what is left at your death | Your heirs | Your heirs (unpaid note) | Charity |
The CRUT and the installment sale look similar on annual tax. The difference is at the end: the note's unpaid balance goes to your heirs, and the CRT's remainder goes to charity. You also get a charitable deduction up front with the CRT, which the example ignores.
Its size depends on your age, the payout rate and the §7520 rate, and it is limited to 30% of your contribution base for capital gain property given to a public charity (§170(b)(1)(C)), with a 5-year carryforward. Starting in 2026 there is also a 0.5% floor on itemized charitable deductions (§170(b)(1)(I)).
Run the installment side with your own numbers in the calculator.
Side by side
| Feature | Installment sale (seller financing) | Charitable remainder trust |
|---|---|---|
| Tax at sale | On payments received (§453) | None; trust is exempt |
| Recapture | §1245 recapture taxed in year of sale (§453(i)); see recapture in an installment sale | Recapture is tier-1 ordinary income, carried out first |
| Income | Note payments set by the deal | Fixed amount or fixed % of trust value |
| Investment control | None; you hold a note | Trustee invests the full proceeds |
| Credit risk | The buyer | None on a buyer; market risk on the trust |
| Charitable deduction | None | Yes, for the remainder value |
| What heirs get | The unpaid note | Nothing from the trust (some donors buy life insurance separately) |
| Can you change your mind? | You can sell or pledge the note, with tax consequences | Irrevocable |
A deferred sales trust and a structured installment sale are other ways to spread gain after a cash closing. A structured sale is usually funded by a fixed annuity the assignment company owns (some programs use a funding agreement), and the seller chooses the schedule before closing.
The payments depend on the assignment company's ability to pay, there is no published IRS ruling on this specific structure, so have your CPA review it, and the commission is built into the pricing.
Traps to avoid
- Prearranged sale. If the trust is legally bound to sell to a specific buyer when you contribute, the IRS can tax the gain to you. Rev. Rul. 78-197 says the IRS will tax the donor only if the donee is legally bound or can be compelled to sell, but the Tax Court applies a broader test asking whether your right to the income had already crystallized (Dickinson, T.C. Memo. 2020-128). Contribute before a binding contract.
- Mortgaged property. A CRT must function exclusively as a CRT from creation (Reg. §1.664-1(a)(4)). Debt can make you the owner of part of the trust or turn the gift into a partial bargain sale. Pay off or restructure debt first, with counsel.
- Selling on a note already. Giving away an installment obligation is a disposition under §453B, which triggers your deferred gain. The CRT decision comes before the sale, not after.
- Unmarketable property in a CRUT. Land that takes time to sell may not produce cash for payouts. A "flip" unitrust can start as a net-income trust and convert to a fixed percentage when a triggering event such as the sale of unmarketable assets occurs (Reg. §1.664-3(a)(1)(i)(c)).
- Debt-financed or business income. A CRT with unrelated business taxable income owes a 100% excise tax on it (§664(c)(2)).
Bottom line
A CRT and an installment sale can produce similar annual tax, but a CRT sends the remainder to charity and an installment note keeps it for your family. If you are charitably inclined, a CRT can add a deduction and reinvest the full untaxed proceeds. If you are not, seller financing usually wins. Decide before you sign a purchase contract.
Questions to ask your CPA
- How much charitable deduction would a CRAT or CRUT give me at my age and today's §7520 rate, and how much can I use?
- Will my payments be mostly tier-1 ordinary income or tier-2 capital gain?
- Is my property debt-free and not already under a binding sale contract?
- Should I use a flip unitrust because the property may take time to sell?
- How does the after-tax income compare with seller financing the property myself?
- What will my heirs receive under each option?
Run your own numbers. Compare a cash sale, seller financing and a structured installment sale side by side, free.
Educational only, not tax, legal or investment advice. Examples are illustrative. Have your CPA or tax attorney review your facts before you act.
Hans Goldstein is an Enrolled Agent, admitted to practice before the Internal Revenue Service, and a licensed insurance agent (CA Insurance License #4273294). He is not a CPA or attorney. He is paid a commission only if a structured installment sale is funded; seller financing pays him nothing. Disclosures.