Deferred Sales Trust vs Installment Sale: What Is Different
A deferred sales trust is an installment sale to a trust instead of to the real buyer. You sell your property to the trust for its promissory note, the trust immediately resells the property to the buyer for cash, invests that cash, and pays you over time; you report gain under Section 453 as the payments arrive. The difference from ordinary seller financing or a structured installment sale is who holds the money: in a deferred sales trust, a trustee you do not control invests the full proceeds, and your payments depend on how that goes.
"Deferred sales trust" is a marketing name, not a Code section. You will also see it called a "453 trust" or an "installment sale trust." This page compares it with the two other ways to be paid over time, lays out the tax questions, and gives you the list of things to get in writing. One disclosure up front: Hans earns a commission only if a structured installment sale is funded, and nothing on a deferred sales trust, seller financing or a 1031, so weigh this comparison with that conflict in mind.
Naming trap: two different "DSTs." In real estate, "DST" usually means a Delaware Statutory Trust, a fractional interest in institutional property that can be 1031 replacement property (Rev. Rul. 2004-86). This article is about the deferred sales trust, an installment-sale arrangement. They have nothing in common except the initials.
What a deferred sales trust is
The typical sequence:
- Before closing, you sign an agreement to sell your property to a trust set up for the transaction, in exchange for the trust's installment note.
- The trust sells the property to the buyer you already found, for cash, usually at the same price.
- The trustee invests the cash, often in a managed portfolio.
- The trust pays you principal and interest on its note on an agreed schedule.
- You report the sale on the installment method: each principal payment is part basis, part gain, using the gross profit percentage fixed at the sale (§453(c); Form 6252).
The theory is that the trust is the buyer, so its note is "an evidence of indebtedness of the person acquiring the property," which is not a payment (§453(f)(3)), while the trust's own resale for cash is the trust's transaction, not yours.
How it differs from seller financing and a structured sale
All three rely on the same installment method. They differ in who owes you, what backs the promise, and who carries which risk.
| Seller financing | Structured installment sale | Deferred sales trust | |
|---|---|---|---|
| Who buys your property | The real buyer | The real buyer | A trust, which resells to the real buyer |
| Who owes you after closing | The buyer | An assignment company, usually funded by a fixed annuity it owns from a highly rated life insurer (some programs use a funding agreement) | The trust |
| What backs the promise | A deed of trust on the property | Nothing you own; you are an unsecured creditor | The trust's investment portfolio, under a trustee you do not control |
| Payment schedule | Set by the note; buyer can often prepay | Fixed before closing; cannot be accelerated or changed | Set by the trust note; varies by arrangement |
| Investment risk | The buyer's credit and the property | The assignment company and whatever funds it | The trust's investments and the trustee's decisions |
| Liquidity | Can sell or pledge the note (tax comes due) | None | Depends on the documents; any cash-out or loan raises tax issues |
| Main tax question | Settled structure | No ruling specifically approves the assignment of the buyer's obligation | No published guidance names it; is the trust the real buyer and independent of you? |
| Cost | Your attorney; no commission | Commission built into the annuity pricing, disclosed | Setup, trustee, legal and investment fees; vary |
The key line is the last-but-two: whose tax question you are carrying. Seller financing has none about the structure. A structured installment sale carries one open question about the assignment (see our structured installment sale guide). A deferred sales trust carries a different one: whether the trust is respected as a separate buyer.
The problems to look at before you sign
This is not a list of accusations. These are the questions a careful CPA or tax attorney will ask, with the authority behind each one.
1. No published IRS guidance addresses it by name. We found no revenue ruling, notice, or listed-transaction designation that names a deferred sales trust, for or against. The IRS Listed Transactions page does not mention it. That cuts both ways: it is not listed, and it is not approved. Anyone who tells you it is "IRS-sanctioned" is overstating.
2. Is the trust the real buyer, or a conduit? When a sale is routed through an intermediary that has no real role, the tax law can treat you as selling directly to the final buyer for cash. The IRS laid out that line of authority in its 2023 proposal on monetized installment sales, citing Commissioner v. Court Holding Co., 324 U.S. 331 (1945), Wrenn v. Commissioner, 67 T.C. 576 (1976), and Blueberry Land Co. v. Commissioner, 361 F.2d 93 (5th Cir. 1966) (88 FR 51756, Aug. 4, 2023). A deferred sales trust with no loan to the seller does not match the elements of that proposed listing, which require a loan (Prop. Reg. §1.6011-13(b)(5), (6)), but the intermediary question is the same question. The trust's independence, its economic role, and the timing of its resale all matter.
3. Control and agency. If you can direct the trustee, choose the investments, or reach the cash, the IRS can argue the trust is your agent and you received the money at closing. Income "set apart" or "made available so that he may draw upon it at any time" is constructively received (Reg. §1.451-2(a)). If the trust counts as related to you under the tax definitions (§453(f)(1)), the related-party resale rule also applies: a related buyer's resale within two years accelerates your gain (§453(e)), and the trust resells at once.
4. Security. A note "secured directly or indirectly by cash or a cash equivalent" is treated as a payment in the year of sale (Temp. Reg. §15a.453-1(b)(3)(i)). If your note is secured by the trust's cash or investments, that rule is in play. Borrowing against the note is also a payment for sales over $150,000 (§453A(d)).
5. Securities law. In Mariani v. Department of Financial Institutions, No. 87072-6-I (Wash. Ct. App. May 5, 2025), a Washington appeals court upheld a finding that one deferred sales trust arrangement and its note were securities offered without registration, sold by an unregistered trustee. The hearing officer in that case dismissed a fraud allegation. It is one state's ruling on one arrangement, but it shows the note can be treated as an investment product, not just a sale document.
6. Fees and investment risk. Your payments come from a portfolio. If it underperforms, or fees are high, the trust may not have the money it promised. Fees are not standardized; get every one in writing, in dollars.
7. The usual installment rules still apply. Depreciation recapture is taxed in the year of sale (§453(i); see installment sale depreciation recapture). If your notes from the year's sales exceed $5 million at year end, the §453A interest charge applies (see Section 453A).
Pros and cons
| Pros | Cons |
|---|---|
| Uses the ordinary installment method; no special statute needed | No published IRS guidance addresses it by name |
| Works for property a 1031 cannot cover (a business, private company stock, a home above the §121 exclusion) | The trust's status as the real buyer can be challenged |
| The buyer pays cash; you do not carry the buyer's credit | Your payments depend on a portfolio and a trustee you do not control |
| Proceeds can be invested in markets rather than locked in a fixed rate | Fees on setup, trusteeship and investment management |
| Any right you keep to change the schedule or steer the money points toward control, which is the tax risk | |
| One state appellate decision treated the note as an unregistered security |
Worked example: what the fees and the schedule do
Simple example. You sell land for $2,000,000 with an $800,000 basis: $1,200,000 of gain, a 60% gross profit percentage. Tax treatment is the same in all three structures if the structure holds: every dollar of principal you receive carries 60 cents of gain.
| Principal received in a year | Gain reported (60%) | Basis recovered |
|---|---|---|
| $100,000 | $60,000 | $40,000 |
| $200,000 | $120,000 | $80,000 |
| $2,000,000 (all of it) | $1,200,000 | $800,000 |
So the choice between the three is not about the tax math. It is about cost and risk. Two quick checks:
- Fees. Every 1% a year of total fees on a $2,000,000 portfolio is $20,000 a year, before any return (simple example). Over ten years, that is $200,000 that is not paying you.
- Returns. If the trust promises you, say, 5% on its note and its portfolio earns 3% after fees, the shortfall comes out of principal meant for later payments (simple example). In a seller note, that risk sits with your buyer; in a structured sale, with the assignment company; here, with the portfolio.
Run the tax side for your own numbers in the installment sale calculator. It models seller financing and a structured sale; a deferred sales trust follows the same §453 schedule math, with its fees and investment results layered on top.
Deferred sales trust vs a 1031 exchange
A 1031 exchange defers all of the gain as long as you reinvest in like-kind real estate within the 45-day and 180-day deadlines (§1031(a)(3)). A deferred sales trust spreads the gain over the payments, and the proceeds can go into anything the trustee invests in.
| 1031 exchange | Deferred sales trust | |
|---|---|---|
| What you must buy | Like-kind real property | Nothing; the trust invests |
| Tax | Fully deferred, carried into the new property | Spread as principal is paid |
| Deadlines | 45 days to identify, 180 days to close | Must be in place before closing |
| Step-up at death | The replacement property can step up (§1014) | An installment note does not; it is income in respect of a decedent (§§691(a)(4), 1014(c)) |
| Assets it can cover | Real property only (Reg. §1.1031(a)-3) | Most assets eligible for §453 (not publicly traded stock, §453(k)(2), or dealer property, §453(b)(2)) |
If you want to stay in real estate, a full 1031 is usually the closer fit. If you want out, compare the three ways to be paid over time side by side (see seller financing vs structured sale), and read the installment sale guide for the base rules. The routing guide in The Waterfall Strategy and our overview of alternatives to selling rental property cover the other exits. And if anyone offers you "most of the money at closing as a loan," that is a different arrangement with a much bigger problem: see monetized installment sales.
For another older alternative, see private annuity vs installment sale.
If you are charitably inclined, compare a charitable remainder trust vs installment sale.
Bottom line
A deferred sales trust is an installment sale to an intermediary trust that resells and invests the proceeds. The tax math is ordinary §453 math. The questions are about the trust: whether it is respected as the real buyer, whether you control or are secured by the cash, what it costs, and whether its investments can pay you. Get your own tax counsel, not the provider's, to review the documents.
Questions to ask your CPA
- Is the trust a genuine, independent buyer, and what in the documents shows it?
- Do I have any power to direct the trustee, the investments or the payment schedule?
- Is my note secured, directly or indirectly, by the trust's cash or investments?
- What are all the fees, in dollars, and what return must the trust earn to pay me as promised?
- Is the trustee or anyone involved related to me (§453(e))?
- How does this compare, after fees and risk, with a seller-financed note, a structured installment sale, a full 1031, or simply paying the tax?
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 a licensed insurance agent (CA Insurance License #4273294) and 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.