Deferred Sales Trust vs Installment Sale at $6M

Marcus sold his industrial-supply company in Columbus, Ohio for $6,000,000. His basis was $4,600,000, leaving a $1,400,000 long-term capital gain. He files jointly, and his other income already pushes the gain into the 20% federal long-term capital-gains bracket plus the 3.8% net investment income tax. Taken all at once, the federal tax on that gain is roughly $333,200 — and his buyer is offering all cash.

A promoter pitched Marcus a deferred sales trust: sell to a third-party trust on a long note, defer the entire gain, and never face the lump-sum bill. His CPA countered that a plain installment sale under IRC §453 would defer the same tax for free — if only the buyer would carry a note. The real question is not “which structure defers more tax.” They defer the same tax. The question is what each one costs, and whether Marcus has a note option at all.

The two structures, in one paragraph each

Installment sale (IRC §453). The buyer pays you over time on a promissory note. You report gain only as principal arrives, using a gross-profit ratio on Form 6252. No trust, no setup fee, no annual management charge. The catch: the buyer must agree to carry the note, and you carry buyer-default risk for the life of it.

Deferred sales trust (DST). You sell the business to an irrevocable third-party trust in exchange for an installment note. The trust then sells to the cash buyer and invests the proceeds. Because you hold a note — not cash — you defer gain under the same §453 rules. The trust pays you note installments on a schedule you set. The catch: setup fees, ongoing trustee and management fees, and heightened IRS scrutiny.

Notice the DST is not its own section of the Internal Revenue Code. It is §453 wrapped in a trust so that a cash sale becomes an installment sale. That is the entire trick — and the entire risk.

The tax math is identical — so cost decides

Both structures defer the same gain because both rely on §453. Here is the federal tax Marcus defers either way:

Ohio taxes capital gains as ordinary income at its top rate, adding roughly $48,000–$49,000 of state tax that both structures also defer. The federal long-term rate of 20% applies because Marcus’s taxable income is above the 2026 MFJ threshold of $600,050; the 15% bracket runs $96,701–$600,050. The 3.8% NIIT applies because his MAGI is over $250,000 (MFJ). Both structures spread the same numbers over the same note years. The deferral is a tie. Cost is the only tiebreaker.

What the DST costs — and the break-even

The installment sale costs essentially nothing beyond drafting the note. The DST stacks two cost layers:

• Setup: $15,000–$50,000 in legal and structuring fees to create the trust, draft the note, and document the third-party relationship.
• Ongoing: roughly 1%–1.5% of trust assets per year in trustee plus investment-management fees. On Marcus’s ~$6,000,000 of trust assets, that is $60,000–$90,000 every year.

Now value the deferral. Deferring $333,200 of federal tax is worth the time value of that money — not the tax itself. At a 5% pre-tax return, deferring $333,200 earns about $16,660 a year. At 7%, about $23,300 a year. Compare that to the DST’s annual fee:

The DST’s annual fee ($75,000) is more than four times the value of the deferral it buys ($16,660). When the buyer would carry a note, the DST is a money-loser from year one. Even setting fees aside, the $15,000–$50,000 setup cost alone takes 1–3 years of deferral value just to recover. If Marcus can get a creditworthy installment note, the direct §453 sale wins decisively.

So when does the DST actually win?

One scenario: the buyer pays all cash and will not carry a note. A direct installment sale requires a buyer-financed note. No note, no §453 deferral — you take cash and owe the full $333,200 now. The DST inserts a third-party trust between you and the cash buyer so that you receive a note instead of cash. In that case the comparison is not DST-vs-note; it is DST-vs-paying-the-tax-today. Then the DST’s fees are measured against deferring the entire $333,200 immediately, and the math can flip positive — especially over a long note.

A second scenario: buyer-default risk on a note is unacceptable. If you carry a $6M seller note and the buyer’s business fails, you may never collect — and worse, a note default can trigger gain recognition on the unpaid balance you never received. A DST takes the buyer’s cash off the table and invests it in a diversified portfolio held by the trust, replacing single-buyer credit risk with market risk. You trade default risk for fee drag.

For the cash-buyer case, the honest comparison is not just DST-vs-installment. It is DST vs. a charitable remainder trust — the CRT also defers gain on a cash sale and pays an income stream, at the cost of locking a remainder to charity. Run both before signing a DST.

The §453A interest charge hits a $6M note

Here is what most DST pitches skip. IRC §453A imposes an interest charge on the deferred tax once your outstanding installment obligations from sales over $150,000 exceed $5,000,000 at year-end. A $6M note clears that line. So on the portion of the deferred tax attributable to obligations above $5M, you owe an annual interest charge at the IRS underpayment rate.

This matters for the comparison in two ways. First, §453A applies to both the direct note and the DST note — it is not a DST-only cost, and any pitch implying the DST escapes it is wrong. Second, it shrinks the net value of deferral on large deals, which makes the DST’s fee drag even harder to justify when a note is available. Model the §453A charge explicitly in both columns.

What most sellers miss: the DST is §453, not magic

The most common misconception is that a deferred sales trust is a special, IRS-blessed deferral vehicle. It is not. There is no IRC section titled “deferred sales trust.” A DST is a private arrangement that relies entirely on the same §453 installment-sale rules that govern a plain seller note. Everything the DST does, §453 is doing under the hood. The trust exists only to manufacture an installment note where the buyer would otherwise pay cash.

That has two consequences. One: if §453 does not defer a particular gain — for example, the portion of a business sale allocated to inventory, or depreciation recapture, both of which are taxed in the year of sale regardless — the DST does not defer it either. Two: the DST’s deferral is only as solid as its compliance with §453 plus the trust’s independence. If the IRS finds you have constructive receipt — the ability to reach the cash — the deferral collapses and the entire gain is taxed in the sale year, often with penalties. The IRS has pursued exactly this against poorly-built DSTs. A clean structure survives; a controlled one does not.

Recapture is the other silent gotcha. Both the direct installment sale and the DST accelerate depreciation recapture under IRC §1245/§1250 into the year of sale — you cannot spread recapture over the note. If a chunk of Marcus’s $1.4M gain is recapture, that piece is taxed now in either structure. Carve recapture out before you celebrate the deferral.

The decision framework

1. Will the buyer carry a creditworthy note? If yes, use the direct installment sale. It defers the same $333,200 for free. Stop here.
2. Is the buyer all-cash, or is the note credit-risk unacceptable? Only then does deferral require a trust at all.
3. If you need a trust, compare DST vs. CRT. The DST returns principal to you eventually; the CRT keeps a remainder for charity but can pay a higher income stream and offers a partial charitable deduction.
4. Stress-test the DST fees against the deferral value. At 1%–1.5% a year on $6M, fees of $60,000–$90,000 must be justified by deferring the full upfront tax over a long enough horizon — not against a note you could have gotten anyway.
5. Confirm trust independence and no constructive receipt. If you can touch the money, the §453 deferral is gone and so is the entire premise.

Marcus’s call

Marcus’s buyer is all-cash, so a direct installment sale is off the table — that is the only reason the DST is even in the conversation. His real choice is DST vs. paying $333,200 now vs. a CRT. Because he wants the principal back for his kids rather than leaving a remainder to charity, the CRT is out. Between the DST and paying now, deferring the full $333,200 over a 20-year note at a 6% return is worth roughly $20,000 a year — below the ~$75,000 annual DST fee. The DST loses on the numbers even in its best-case use.

So Marcus negotiates. He asks the buyer to carry a $2.5M note (under the $5M §453A trigger) for five years and pay the $3.5M balance in cash. He pays tax on the cash portion now and defers the note portion under a plain §453 installment sale — zero trust, zero fees, no constructive-receipt risk. The lever was never the trust. It was getting any note at all from the buyer.