Unlocking Wealth: How an Installment Sales Trust (Deferred Sales Trust) Can Slash Your Capital Gains Tax

If you’re selling a highly appreciated asset—be it real estate, a business, or a stock portfolio—you’re likely facing a significant capital gains tax bill. But what if you could defer that tax, keep more of your money working for you, and build wealth over time? Enter the Installment Sales Trust, otherwise known as a Deferred Sales Trust, a powerful tax-deferral strategy rooted in Internal Revenue Code Section 453. In this post, we’ll break down how a DST works, its benefits, and why it’s a game-changer for savvy investors. 

Disclaimer: This information is for educational purposes only. Tax laws are complex and subject to change, so always consult a qualified tax professional before proceeding. The strategies discussed are based on the tax code as of August 2025, but your situation may vary. DSTs involve risks, including potential IRS scrutiny, and are not explicitly approved by the IRS. Professional advice is essential to ensure compliance and suitability for your circumstances. 

What Is a Deferred Sales Trust? 

A Deferred Sales Trust —also known as an Installment Sales Trust—is a legal structure that allows you to defer capital gains taxes when selling appreciated assets. Unlike a Delaware Statutory Trust (a real estate vehicle), the DST leverages IRC Section 453, which has been in place for over a century, to spread your tax liability over time as you receive payments. 

The Deferred Sales Trust is ideal for assets like: 

• Real estate 

• Businesses 

• Stock portfolios 

• Or many other highly appreciated investments 

By deferring taxes, you keep more capital invested, allowing it to compound and grow over time. 

How Does a Deferred Sales Trust Work? 

Here’s a step-by-step look at the Deferred Sales Trust process: 

1. Asset Transfer: You transfer your asset to a specialized trust before the sale. This trust, managed by an independent third-party trustee, is a separate legal entity. 
2. The Sale: The trust sells the asset to the buyer at the same basis it received from you, avoiding immediate capital gains tax. This typically happens simultaneously with the trust setup. 
3. Promissory Note: You receive a promissory note from the trust for the sale amount, outlining installment payments over a flexible period—months, years, or even decades. 
4. Avoiding Constructive Receipt: Since you don’t directly receive the sale proceeds, you avoid “constructive receipt,” meaning the gain isn’t taxed upfront. Taxes are paid only on each installment, which includes a mix of tax-free basis, capital gain, and interest. 
5. Reinvestment: The trust holds the sale proceeds at custodians like Fidelity or Charles Schwab and, through conversations with your advisor, invests in a diversified portfolio (stocks, bonds, private equity, real estate, etc.) to support the note’s payments. The note’s interest rate, typically 6-10% net over a term like 10 years, is based on the expected performance of these investments. 

Analogy: You as the Creditor 

Think of yourself as a bank. When you get a mortgage, the bank is the creditor, lending money and charging interest (e.g., 5%). In a DST, you’re the creditor. You transfer your asset to the trust, and the trust “owes” you the sale amount, paying you interest (e.g., 8%) based on the performance of its investments. This structure keeps your money working while deferring taxes. 

A Real-World Example 

Let’s put numbers to it. Note that this is an illustrative example; actual taxes and fees will vary based on your situation. 

Scenario Without a Deferred Sales Trust:

• You own an asset (e.g., a business or property) with a $1,000,000 basis that’s now worth $5,000,000. 

• Selling it triggers a $4,000,000 capital gain. 

• Taxes (approximate rates for illustration): 

• Federal capital gains tax (20%): $800,000 

• Medicare tax (NIIT, 3.8%): $152,000 

• State tax (e.g., Colorado, ~5%): $200,000 

• Total tax liability: ~$1,200,000 (30%) 

• After-tax proceeds: $3,280,000 

Scenario With a Deferred Sales Trust:

• You transfer the asset to the DST, which sells it. 

• You receive a promissory note for $5,000,000, deferring the $1,200,000 tax liability. 

• The sale proceeds (net of any upfront setup fees) are invested and compound over time. 

• As you receive installments, you’re taxed on smaller portions, potentially lowering your overall tax burden. 

By keeping nearly the full $5,000,000 invested (minus fees and costs), you harness the power of compounding, potentially boosting your wealth compared to starting with just $3,280,000 after taxes. However, ongoing management fees will apply, which could impact returns. 

Why Use a Deferred Sales Trust? 

1. Tax Deferral

Deferring taxes (e.g., $1,200,000 in the example) means more capital stays invested initially, potentially growing your wealth over time. 

2. Flexibility

You control the payment schedule—monthly, yearly, or even decades out—tailored to your financial goals. 

3. Security

• The trust is managed by an independent trustee with a fiduciary duty to protect your interests. 

• Assets are held by reputable custodians like Charles Schwab or Fidelity. 

• You’re a secured creditor with a promissory note backed by a comprehensive security agreement, ensuring protection against mismanagement. 

4. Estate Planning Benefits

If you pass away, the promissory note transfers to your beneficiaries or a family trust, maintaining tax deferral and allowing them to adjust payment terms if needed. 

5. Track Record

The DST concept stems from the Revenue Act of 1921 and has been refined since the 1990s. While promoters report thousands of transactions with no reported incidents of unauthorized activity, DSTs have faced IRS scrutiny and audits. Always verify with professionals. 

Deferred Sales Trust vs. Traditional Installment Sale 

In a traditional installment sale, you finance the sale directly with the buyer, spreading taxes over time but taking on the risk of buyer default. If the buyer fails to pay (e.g., the business they bought flops), you’re left chasing payments or repossessing a potentially worthless asset. 

A Deferred Sales Trust eliminates this risk: 

• The sale is a full cash transaction, so the buyer is out of the picture. 

• The trust assumes the payment obligation, backed by diversified investments and professional management. 

Why an Independent Trustee? 

The trust’s independence is critical to avoid constructive receipt, which could trigger immediate taxation. A vetted, independent trustee (from a proprietary network of about 12 nationwide) handles six key duties: 

1. Safeguarding Assets: Ensures trust assets are secure and perform to meet payment requirements. 
2. Investment Alignment: Works with you and your advisor to align investments with your risk tolerance and goals. 
3. Executing Instructions: Carries out your investment directives accurately and promptly. 
4. Performance Reporting: Provides regular, accurate investment performance reports. 
5. Facilitating Changes: Supports adjustments to keep the trust aligned with your goals. 
6. Tax Compliance: Files the trust’s tax return and provides annual earnings statements. 

Risks and Misconceptions 

There are some misconceptions about Deferred Sales Trusts, particularly confusion with monetized installment sales, which have been blacklisted by the IRS on its "Dirty Dozen" list. To be clear, a Deferred Sales Trust is not a monetized installment sale, which is explicitly prohibited under IRC Section 453 due to practices like pledging or loaning funds back to the seller. In contrast, Deferred Sales Trusts s are fully compliant with IRC Section 453, focusing on legitimate installment sales without monetization or seller loans. Over nearly 30 years, Deferred Sales Trusts have undergone three IRS field audits with a perfect track record—IRS-reviewed, audit-supported, and backed by full legal compliance. While not explicitly IRS-approved, this history underscores the Deferred Sales Trust’s robust design. 

Note there are some upfront setup fees and ongoing management costs, so vet promoters carefully and work with a trusted tax advisor to ensure compliance. Additionally, Deferred Sales Trusts involve: 

• Upfront setup fees (often around 1-1.5% of the asset value) and ongoing management costs (typically 1-2% annually), which reduce the amount available for investment and can impact overall returns. 

• The need for a trusted tax advisor and attorney to ensure compliance and mitigate risks like potential re-characterization by the IRS. 

At Horizon Wealth, we provide a detailed due diligence email for your tax professional to review, ensuring transparency and compliance. 

Final Thoughts 

The Installment Sales Trust, or Deferred Sales Trust, is a tool worth considering for those facing large capital gains taxes, offering potential flexibility, security, and tax deferral benefits. However, it requires careful planning, professional guidance, and awareness of costs and risks to ensure it aligns with your goals. 

At Horizon Wealth, we’ve used Deferred Sales Trusts for eight years as a cornerstone of our tax-focused strategies. Want to learn more? Check out our educational videos featuring interviews with our partnering trustee, or reach out to discuss how a Deferred Sales Trust might work for you, keeping in mind the need for personalized advice. 

Keep your wealth working smarter. Stay tuned for more tax strategies to maximize your financial future! 

Disclaimer: This blog is for informational purposes only and does not constitute financial or tax advice. Always consult a professional before making investment or tax decisions. 

Horizon Wealth is a registered investment advisor.  The information presented in this publication is the opinion of Horizon Wealth and does not reflect the view of any other person or entity.  The information provided is believed to be from reliable sources but no liability is accepted for any inaccuracies.  This is for information purposes and should not be construed as an investment recommendation.  Past performance is no guarantee of future performance. Statements in this publication are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in this publication. Investing in alternative and private offerings involve risks, including the potential loss of principal. Always consult an investment advisor regarding your specific situation.