Structured Installment Sale Trusts: Capital Gains Deferral Without the DST Risk

If you are selling a business, investment real estate, or other appreciated asset with a large embedded gain, the capital gains tax bill is likely the most significant single cost of the transaction. Deferring that tax — spreading recognition over years rather than paying it all in the year of sale — is a legitimate and well-established goal. IRC § 453 has allowed installment sale treatment for decades. The question is not whether deferral is available, but how to structure it in a way that is defensible, durable, and not a candidate for IRS challenge.

This page explains how Cutler Riley structures installment sale deferral using an independent trust as the payment obligation vehicle — and why our approach differs from, and in important respects is more defensible than, the typical Deferred Sales Trust arrangement that has drawn IRS scrutiny.

What a Deferred Sales Trust Is — and Where It Gets Into Trouble

A Deferred Sales Trust, as typically promoted, works like this: the seller transfers the asset to a newly created trust before the sale. The trust then sells the asset to the ultimate buyer and holds the proceeds. In exchange for transferring the asset, the seller receives an installment note from the trust — a promise to receive payments over time. Because the seller does not receive all the proceeds at once, the theory is that gain is recognized only as installment payments are received under IRC § 453.

The IRS concern with this structure is fundamental. When a seller transfers an asset to a trust and the trust immediately sells it to a buyer who was already lined up, the IRS can argue several things: that the transfer to the trust was a step transaction that should be collapsed so that the seller is treated as selling directly to the buyer; that the seller constructively received the full sale proceeds at the time of the trust's sale because the seller was the economic beneficiary of a trust they effectively controlled; or that the trust was not a genuine independent buyer but a conduit. The United States v. Kaylor DST Services enforcement action and the IRS's Chief Counsel Memorandum AM 2023-006 both reflect active scrutiny of DST structures that share these characteristics.

The problem is not installment sales — § 453 is not under attack. The problem is the two-step architecture of the standard DST: the seller sells to the trust, which sells to the buyer. That round trip is what makes the structure look like a step transaction to the IRS, and it is what distinguishes problematic DST arrangements from legitimate installment sale planning.

How Cutler Riley Structures It Differently

The structure we use eliminates the two-step problem entirely by never having the trust buy the asset.

Here is how it works: The seller negotiates and enters into a purchase agreement directly with the buyer — exactly as in any ordinary sale. Before closing, the purchase contract is amended by agreement between the seller and buyer to convert some or all of the purchase price from a lump-sum payment to an installment obligation: the buyer agrees to pay the deferred portion over time according to a specified schedule rather than all at once at closing.

At that point, the buyer's installment payment obligation — not the asset, and not the proceeds — is assigned to an independent irrevocable trust. The buyer pays the trust. The trust, in turn, makes the scheduled installment payments to the seller.

The seller never sold to the trust. The trust never bought the asset. The trust never held the sale proceeds. The trust is not an intermediary in the sale — it is the successor obligor on the buyer's payment obligation. The asset was sold directly from seller to buyer in a single transaction, with the installment terms negotiated as part of that transaction and the payment obligation subsequently assigned to an independent vehicle.

This structure is much closer to a straightforward § 453 installment sale — which is exactly what it is — than the seller-to-trust-to-buyer arrangement that characterizes the typical DST. The trust's role is analogous to an institutional assignment company in a conventional structured installment sale: it holds and services the buyer's payment obligation but plays no role in the asset sale itself.

Why This Structure Is More Defensible

The core IRS concern with standard DST arrangements is constructive receipt — the argument that the seller had an unobstructed right to receive the full sale proceeds at the time of the trust's sale to the buyer, and therefore must recognize the full gain in that year regardless of when they actually receive payment. Constructive receipt under Treasury Regulation § 1.451-2 applies when a taxpayer has an unqualified, vested right to receive income and only chooses not to receive it.

In a standard DST, the seller transfers the asset to the trust before the ultimate buyer pays. At the moment the trust receives the full purchase price from the buyer, the argument goes, the seller — as the trust's beneficiary — has constructively received those proceeds.

In Cutler Riley's structure, this argument has no purchase. The seller never had an unobstructed right to the full purchase price in cash. The purchase contract was amended to create an installment obligation before the right to lump-sum payment crystallized. The seller agreed, as part of the original sale, to receive payments over time. There is no moment at which the seller held or could have demanded the full lump sum. The installment terms were negotiated into the contract itself — not retrofitted after the fact.

This matters because the constructive receipt doctrine requires that the taxpayer have an unqualified right to receive the income and simply elect not to. A seller whose contract specifies installment payments never had that right. This is the fundamental reason why an installment sale negotiated into the original purchase agreement — before the seller has any right to the cash — is on much stronger footing than a structure in which the seller first generates a right to the full purchase price and then tries to recharacterize it through a trust.

The same logic applies to the step transaction doctrine. There is no step transaction when there is only one transaction: a direct sale from seller to buyer under an installment contract. The trust's involvement is limited to assuming the buyer's payment obligation after the sale is complete. That is not a step toward anything — it is a post-sale administrative arrangement.

The IRC § 453 Foundation

Installment sale reporting under IRC § 453 is the legal basis for recognizing gain as payments are received rather than in the year of sale. For a qualifying installment sale — a disposition of property in which at least one payment is received after the close of the taxable year in which the disposition occurs — the seller reports the gross profit percentage of each payment received as capital gain in the year of receipt. The remainder of each payment represents return of basis and, where applicable, interest income.

The tax benefits are real. Spreading recognition over multiple years can keep the seller in lower capital gains brackets, reduce or eliminate exposure to the 3.8% Net Investment Income Tax, and avoid phaseouts and surtaxes that would otherwise apply if the full gain landed in a single year. The deferral does not eliminate the tax — it controls when it is paid.

IRC § 453A imposes an interest charge on the deferred gain from installment obligations exceeding $5 million from the sale of non-dealer property in any single year. This charge represents the time value of the deferred tax and is a real cost that should be factored into any analysis of installment sale deferral for large transactions.

IRC § 453 does not apply to dealer sales, sales of publicly traded property, or recapture income under § 1245 or § 1250 to the extent it exceeds gain otherwise recognized in the year of sale. Your CPA must confirm eligibility before the structure is implemented.

The Pledge Rule and Liquidity

One point that eliminates installment sale treatment entirely is pledging the installment obligation as security for a loan. Under IRC § 453A(d), if the seller pledges the installment note or the right to receive installment payments as collateral for a loan, the amount borrowed is treated as a payment received in the year of the pledge, triggering immediate gain recognition on the pledged amount. This is the mechanism that makes monetized installment sales — where the seller borrows against the installment note to obtain immediate liquidity — a listed transaction on the IRS's Dirty Dozen list.

The Cutler Riley structure does not involve any pledge, loan, or monetization arrangement. The seller accepts that deferral comes with illiquidity: they cannot have access to the full purchase price immediately and also claim they have not received it. That is the fundamental bargain of installment sale deferral, and it is the reason this structure is defensible where monetized arrangements are not.

Who This Structure Is For

This structure is most useful for sellers who have a large embedded gain, do not need all the proceeds immediately, and want to convert a significant taxable event into a predictable income stream.

The most common situations are a business owner selling a closely held company who wants retirement income rather than a single lump sum taxed at the highest rates, a real estate investor selling appreciated rental property where a 1031 exchange is not practical or desired, and a seller who understands that deferral is not elimination — tax will be owed as payments are received — but values the ability to control the timing and bracket exposure of that recognition.

This structure is not suitable for sellers who need the full purchase price at closing, sellers whose assets do not qualify for § 453 installment treatment, or sellers with significant debt encumbering the asset being sold, where the debt-relief component may be treated as a payment received at closing regardless of the installment structure.

Cutler Riley's Role

Cutler Riley drafts the trust agreement, the purchase contract amendment converting the sale to installment terms, and the assignment of the buyer's payment obligation to the trust. We also serve as trustee or coordinate trustee appointment with an independent third-party trustee, depending on the structure and the parties involved.

This is a collaborative engagement. Your CPA must be involved from the beginning to confirm § 453 eligibility, model the gain recognition schedule, and advise on the interaction with § 453A interest charges and other tax considerations. The legal structure and the tax analysis are both essential, and neither replaces the other.

We do not sell annuity products, funding agreements, or investment products. Our role is the legal structure. The economics of how the trust holds and services the payment obligation — whether through cash, bonds, annuities, or other assets — are determined in coordination with your financial advisor.

Frequently Asked Questions

How is this different from a typical Deferred Sales Trust? In a typical DST, the seller transfers the asset to the trust, which then sells to the buyer. The trust holds the sale proceeds and pays the seller over time. The IRS concern is that this two-step arrangement is a step transaction or that the seller constructively received the proceeds when the trust sold the asset.

In Cutler Riley's structure, the seller sells directly to the buyer in a single transaction. The installment obligation is negotiated into the purchase contract itself. The trust does not buy the asset or hold the proceeds — it assumes the buyer's payment obligation after the sale closes. The seller never had an unobstructed right to receive the full cash price, so the constructive receipt argument has no application. There is only one sale, and the trust plays no role in it.

Does the trust hold the sale proceeds? No. The buyer pays the full purchase price (or the deferred portion) to the trust in satisfaction of the installment obligation. The trust holds assets sufficient to service the payment schedule — but it does not receive a lump sum of sale proceeds that it then reinvests on the seller's behalf. This is a meaningful structural distinction from the standard DST.

Is this the same as a monetized installment sale? No. A monetized installment sale involves pledging the installment obligation as collateral for a loan that gives the seller immediate access to the full proceeds — which the IRS has designated a listed transaction. Cutler Riley's structure involves no pledge, no loan, and no access to the full proceeds. The seller accepts genuine illiquidity as the price of deferral.

What assets qualify for installment sale treatment under § 453? Most sales of appreciated real property and business assets qualify. Exceptions include dealer sales of property held primarily for sale to customers, sales of publicly traded securities, and the recapture income portions of gains on depreciable property under §§ 1245 and 1250. Your CPA must confirm eligibility for your specific asset and transaction.

Does the installment obligation need to be for the full purchase price? No. Many sellers take a portion of the purchase price at closing — fully taxable in the year of sale — and structure the remainder as an installment obligation assigned to the trust. The hybrid approach allows some immediate liquidity while deferring the majority of the gain.

What does this cost? The fee for drafting the trust, the purchase contract amendment, and the assignment documents depends on the complexity of the transaction and is discussed at your free consultation before you commit to anything. This is not a packaged product with a fixed fee — it is a custom legal engagement priced to the scope of the work.

Related Pages

Selling a Business or Property and Facing a Large Capital Gains Bill?

If you are considering a structured installment sale and want to understand whether this approach fits your transaction, book a free consultation. We will walk you through the structure, explain how it differs from standard DST arrangements, and work with your CPA to assess whether § 453 installment treatment is available for your specific asset and transaction.

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