Deferred Sales Trust: What Section 453, IRS and Courts Say (2026)

First, which DST?

On this site “DST” usually means a Delaware statutory trust: a trust that owns real estate and sells beneficial interests that can be replacement property in a 1031 exchange. Our Delaware statutory trust guide covers that product. A deferred sales trust shares the initials and nothing else. You do not buy into it; you sell to it. It is not replacement property, it does not use section 1031, and it pays you with a promissory note.

The Washington Court of Appeals, in the only appellate opinion we found on one, described the structure from facts the parties stipulated: the trust “acquires the appreciated asset from the seller,” gives the seller a promissory note, and then “often sells the property to a third-party buyer for cash.” The trust invests the proceeds to meet the note and “build additional returns on the invested sale proceeds.” The court also recorded that the concept “relies on Section 453 of the Internal Revenue Code and a private letter ruling from the Internal Revenue Service.” Neither the opinion nor the agency order identifies that ruling by number.

What section 453 actually says

Everything a deferred sales trust promises comes from a handful of sentences in the Internal Revenue Code. Read together (our reading), they give the seller a real deferral if the trust is a genuine buyer, and take it away in several specific cases.

• The rule. Section 453(a): “income from an installment sale shall be taken into account for purposes of this title under the installment method.” An installment sale is “a disposition of property where at least 1 payment is to be received after the close of the taxable year in which the disposition occurs” (453(b)(1)).
• How much is taxed each year. Section 453(c) taxes “that proportion of the payments received in that year which the gross profit … bears to the total contract price.” If your gain is 75% of the price, 75 cents of every principal dollar is gain when it arrives (our arithmetic on the statute's ratio).
• Why the trust's note is not cash. Section 453(f)(3): “the term ‘payment’ does not include the receipt of evidences of indebtedness of the person acquiring the property (whether or not payment of such indebtedness is guaranteed by another person).” The exception in 453(f)(4) is a note “payable on demand” or “readily tradable”: those count as payment.
• What cannot be deferred. Section 453(i)(1)(A): “any recapture income shall be recognized in the year of the disposition,” meaning amounts treated as ordinary income under sections 1245 or 1250. And section 453(k)(2)(A) denies the installment method for “stock or securities which are traded on an established securities market”; for those, all payments are treated as received in the year of sale.
• The related-party trap. If you sell to a related person who resells within 2 years, section 453(e) treats you as receiving the resale proceeds. A deferred sales trust resells almost at once, so the structure depends on the trust and its trustee not being “related persons” under the section 318 and 267(b) tests that 453(f)(1) borrows (our reading). That is why promoters insist on an independent trustee, and why a trust run by you or your family would not work.
• You can opt out. Section 453(d) lets a seller elect out of the installment method by the return due date, which matters if a later year's tax rates look worse.

Three ways the deferral can fail (our reading)

1. The trust is treated as your agent, not a buyer. The IRS laid out its argument against a related structure in the 2023 proposed rule on monetized installment sales: an intermediary “interposed between the seller and the buyer for no purpose other than Federal income tax avoidance” that “neither enjoys the benefits nor bears the burdens of ownership” is disregarded, and the sale is treated as made directly to the buyer. It quotes the Supreme Court in Commissioner v. Court Holding Co., 324 U.S. 331 (1945): “A sale by one person cannot be transformed for tax purposes into a sale by another by using the latter as a conduit through which to pass title.” The IRS's description of the problem cases includes a resale “almost simultaneously with the purported sale to the intermediary for approximately the same negotiated purchase price, less certain fees.” Estate Planning Team's own page says the trust “often acquires the property from the client for a price that may not be materially different from the sales amount” and that the trust “should be set up before all purchase agreement contingencies have been removed,” that is, with a buyer already in hand. Those facts sit close to the pattern the IRS described, even though the IRS was writing about a structure with a loan.

2. The note is secured by the trust's cash. The installment regulation is direct: “Receipt of an evidence of indebtedness which is secured directly or indirectly by cash or a cash equivalent, such as a bank certificate of deposit or a treasury note, will be treated as the receipt of payment” (Treas. Reg. 15a.453-1(b)(3)(i)). In its Example (8), a $1,000,000 note backed by $400,000 of cash and Treasury bills in an escrow the seller can reach on default is treated as $400,000 of payment. A deferred sales trust holds sale cash and invests it; Estate Planning Team's trustee page refers to “each seller/creditor who holds a secured interest in the trust” and to “the investments securing their note.” How the security is drafted matters for whether that clause is triggered; ask the drafting attorney to show you, in writing, why it is not.

3. You can reach the money. Under the constructive-receipt regulation, income is taxed when it is “set apart for him, or otherwise made available so that he may draw upon it at any time” (Treas. Reg. 1.451-2(a)); it is not when control “is subject to substantial limitations or restrictions.” Flexibility to start, stop or speed up principal, which promoters advertise, is exactly what an examiner would test against that sentence. In the Washington case the sellers asked for an early withdrawal for a trip and, the court wrote, “clearly considered this accumulated interest to be their money.”

A fourth risk is a loan. If you borrow against the note, section 453A(d) treats “the net proceeds of the secured indebtedness” as a payment on the note, and a loan funded with the buyer's cash is the core of the monetized installment sale the IRS proposed to list.

The $5 million interest charge (section 453A)

Section 453A applies to installment obligations from the sale of property whose “sales price of such property exceeds $150,000.” For those, interest is owed on the deferred tax only if “the face amount of all such obligations held by the taxpayer which arose during, and are outstanding as of the close of, such taxable year exceeds $5,000,000.” The charge equals the deferred tax liability times an “applicable percentage” (the share of the year's notes above $5,000,000) times the IRS underpayment rate, which IR-2026-98 sets at 7% for October 1 to December 31, 2026. For long-term gain, the deferred tax uses the 20% maximum rate in section 1(h). The statute excludes personal-use property sold by an individual and farm property.

A worked example with our numbers (hypothetical vacant land, so no depreciation recapture; all arithmetic is ours):

The charge recurs every year the note is outstanding, at that year's rate, and it is computed on the tax you have not paid yet. Estate Planning Team's page says the $5,000,000 threshold is per taxpayer, so “a married couple owning a property jointly would have a threshold of $10,000,000.” The statute counts obligations “held by the taxpayer” and says nothing about spouses; that is the company's reading, and one to check with your own CPA.

The official record, searched on October 11, 2026

The usual claim on promoter sites is that the deferred sales trust is “IRS-compliant.” We looked for the record that would show that, and for the record that would show the opposite.

The most useful document in the docket is a comment from the American College of Trust and Estate Counsel. It says its memo is “specifically not intended to address the transaction commonly referred to as a ‘Deferred Sales Trust,’” that such trusts “probably do not share” most of the elements of monetized installment sales, and adds that this “does not mean” it believes they are legitimate installment sales. An anonymous attorney's letter takes the other side, arguing that an “Intermediated Installment Sale is not substantially similar to the Monetized Installment Sale” because it “does not involve any loan or monetization of the installment obligation,” and citing the Fifth Circuit's 1971 decision in Rushing v. Commissioner.

On the federal summons case, the docket we saved shows only its title, the cause (26 U.S.C. 7402, petition to enforce an IRS summons), an entry described as “Enforce” on February 5, 2024, and its closing date. We could not obtain the petition itself, so we do not describe what the IRS was investigating; the respondents have not been found liable for anything in that docket.

Washington: a deferred sales trust was a security

The case began with a vacation property bought in the 1970s for $15,000 and worth over $200,000 in 2013. The owners sold it to a newly formed trust; an accounting firm, Prestige, and its accountant Michael Mariani served as trustee. In October 2013 the trust sold to third-party buyers for a $50,000 down payment and $188,000 in installments. The owners never signed any of the five draft promissory notes, each at 8%. The state's final order records a draft note of $275,000 with quarterly interest-only payments of $4,125 and a balloon on October 1, 2023, and a finding that the trust anticipated earning 8% while 6% was to be paid to the sellers, with “Any investment income beyond the money obligated” under the note going to the trustee firm.

The owners asked to unwind in 2017 and complained to the Department of Financial Institutions, which opened an investigation in July 2017, issued a Statement of Charges on October 6, 2020 and, after an administrative hearing in May 2022, issued a final order. The administrative judge dismissed the fraud allegation; the department found an unregistered security sold by an unregistered salesperson and ordered a $20,000 fine and $15,000 in costs. The superior court and then the Court of Appeals affirmed. The appeals court applied the Howey test and held: “Because the DST is a common enterprise with an expectation of profits resulting from third-party efforts, we conclude that the Department correctly determined it to be a security.”

Two findings matter beyond Washington (our reading). The isolated-transaction exemption failed because a witness “testified as to dealing with hundreds of DST transactions” and the structure's creator admitted involvement in thousands. And the private-offering exemption failed because the sellers were not shown “to be able to fend for themselves.” The losing side has asked the Washington Supreme Court for review (No. 104367-8), arguing the court effectively held that all deferred sales trusts are securities; the department answered on September 5, 2025. We could not confirm on October 11, 2026 whether review was granted. Until then the published opinion stands.

Who sells it, and how they are paid

The network whose site we read is Estate Planning Team, a membership group based in Indian Wells, California, which says it has been helping sellers with the Deferred Sales Trust “For more than 20 years.” Its website (October 11, 2026) recruits financial advisors, insurance and real estate professionals, CPAs, attorneys, title reps, mortgage lenders, qualified intermediaries and trustees, and tells advisors the product can help them “generate more AUM.” For trustees it says: “As a DST Trustee, you will earn an annual fee based on a percentage of assets in the trust,” that its “average DST case is between $1M-$3M, and some cases have exceeded $50M,” and that “Active trustees have the potential to make well over $100k annually.” Its FAQ says there are ongoing fees “for trustee, administrative and investment management services.” We found no published fee schedule.

Some of the company's claims are worth setting next to the statute:

• It tells advisors the product lets clients “fully defer capital gains and depreciation recapture taxes.” Section 453(i) says recapture income under sections 1245 and 1250 “shall be recognized in the year of the disposition.” How much of a given seller's depreciation is recapture income depends on the asset; the blanket claim does not match the statute's text (our reading).
• It lists “investment portfolios” among qualifying assets. Section 453(k)(2)(A) denies installment treatment for publicly traded stock and securities.
• Its comparison table says “Audit defense included” for the deferred sales trust and not for a 1031 exchange. An audit defense promise is a contract term with the seller of the product; it does not change the tax result.
• It says the structure is “an IRS-compliant 453 installment sale structure.” As the table above shows, there is no IRS document that says so by name.

We did not find an SEC or FINRA action naming a deferred sales trust in our searches; that is not proof none exists. Washington is the only state securities regulator whose order we found.

Deferred sales trust vs 1031 exchange vs charitable remainder trust

The rules of a 1031 exchange are in our 1031 exchange rules guide. How the gain on a sale is taxed if you do nothing is in our capital gains tax on real estate guide, and the part of it that can never be spread is in our depreciation recapture guide. The charitable remainder trust column is explained in full in our charitable remainder trust guide.

Material terms to get in writing before you sign

Verdict (our reading)

The installment method is law, and selling to a genuine, independent buyer who owes you money over time defers tax. The weak point of a deferred sales trust is not section 453; it is whether a trust formed for one sale, with a buyer already under contract, that resells the same day for about the same price and holds the cash for you, is that buyer. No court or IRS document has answered that for deferred sales trusts by name, and the one court that has looked at one, in Washington, treated it as an investment product sold without registration. Against that, the deferral has real value on a large gain held for many years, and section 453A caps the benefit above $5,000,000 of notes. A seller who still wants one should treat it as a securities purchase plus an aggressive tax position: independent counsel, a signed note, a written opinion addressing the three failure modes above, and a plan to pay the tax if it fails. For many real estate sellers a 1031 exchange, a plain installment sale to the actual buyer, or a charitable remainder trust does the same job with more law behind it.

What a seller can do with this

• Ask for the private letter ruling by number and read it yourself. It binds the IRS only for the taxpayer who asked for it (section 6110(k)(3)).
• Get a tax opinion from a lawyer you hire and pay, not one supplied by the network selling the trust, addressing Court Holding, 15a.453-1(b)(3)(i), 1.451-2 and 453A for your facts.
• Run the numbers both ways: tax now, a 1031 exchange, a direct installment sale to your buyer, and the trust after its fees and the 453A interest. A deferral that costs, say, 1% a year in fees on the whole sale price (a hypothetical figure) is not free.
• Check the people: the trustee's and adviser's records on FINRA BrokerCheck and the SEC's adviser search, and your state securities regulator. In Washington the accountant who acted as trustee was found to have sold securities without being registered.
• Disclose properly. If the IRS finalizes the monetized installment sale rule and your structure includes a loan, failure to disclose a listed transaction can cost 75% of the tax decrease, at least $5,000 and up to $100,000 for an individual (section 6707A, as described in 88 FR 51756).

FAQ

Sources, read and saved on October 11, 2026: 26 U.S.C. 1, 453, 453A, 664, 1031 and 6110, United States Code 2024 edition, Government Publishing Office (govinfo.gov); 26 CFR 15a.453-1 and 1.451-2 on the eCFR (version as of October 1, 2026); the proposed rule Identification of Monetized Installment Sale Transactions as Listed Transactions, 88 FR 51756 (August 4, 2023), and its hearing cancellation, 88 FR 70412 (October 11, 2023), with Federal Register API searches; regulations.gov docket IRS-2023-0037 and its six public comments; IRS news releases IR-2023-139, IR-2024-104 and IR-2026-98; U.S. Tax Court DAWSON opinion and order searches; SEC EDGAR full-text search; USPTO trademark search and TSDR status pages for serial numbers 77035642, 77503043, 77503067, 85689512, 87352615, 88508273 and 98341846; Mariani v. Department of Financial Institutions, No. 87072-6-I, 34 Wn. App. 2d 361 (2025), slip opinion from the Washington Courts website, with the petition for review and the department's answer in Supreme Court No. 104367-8; Washington Department of Financial Institutions Final Decision and Order No. S-18-2520-19-SC01-FO01; the PACER docket of United States v. Kaylor DST Services, LLC, No. 8:24-cv-00003, as mirrored by CourtListener; and the Estate Planning Team website (myept.com), whose statements are the company's claims. Counts are from our script over the saved search results; the section 453A example, ratios and percentages are our arithmetic. This is analysis of public documents, not investment, legal or tax advice.