--- title: "Unlocking Wealth: How an Installment Sales Trust (Deferred Sales Trust) Can Slash Your Capital Gains Tax" description: Learn how a Deferred Sales Trust can help you defer capital gains taxes and grow your wealth by reinvesting proceeds from the sale of highly appreciated assets. image: https://blog.hwtaxstrategies.com/hubfs/AdobeStock_340642333.jpeg --- [Skip to main content](https://blog.hwtaxstrategies.com/insights/unlocking-wealth-how-an-installment-sales-trust-deferred-sales-trust-can-slash-your-capital-gains-tax#maincontent) [Login](https://login.orionadvisor.com/login.html?g=6ad25fdc-1d37-4c1d-80b1-f64d1cd5c2e5&e=2&i=1899) [Secure Documents](https://www.encyro.com/hwtaxstrategies) [![HW Tax Strategies](https://blog.hwtaxstrategies.com/hs-fs/hubfs/Branding/Logos/Tax%20Strat%20logo%20-02.png?width=307&height=93&name=Tax%20Strat%20logo%20-02.png) ![Tax Strat logo -06](https://blog.hwtaxstrategies.com/hs-fs/hubfs/Branding/Logos/Tax%20Strat%20logo%20-06.png?width=8536&height=2592&name=Tax%20Strat%20logo%20-06.png)](https://hwtaxstrategies.com) [Home](https://hwtaxstrategies.com/) [About](https://hwtaxstrategies.com/about) [Strategy](https://hwtaxstrategies.com/strategy) [Services](https://hwtaxstrategies.com/services) [Resources](https://blog.hwtaxstrategies.com/insights) - [Blog](https://blog.hwtaxstrategies.com/insights) - [FAQ](https://hwtaxstrategies.com/faq) [Contact Us](https://hwtaxstrategies.com/contact-us) Search for topics or resources Enter your search below and hit enter or click the search icon. 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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**](https://hwtaxstrategies.com/strategy), 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.  1. **Flexibility** You control the payment schedule—monthly, yearly, or even decades out—tailored to your financial goals.  1. **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.  1. **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.  1. **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 HW Tax Strategies, 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!*  [![New call-to-action](https://hubspot-no-cache-na2-prod.s3.amazonaws.com/cta/default/46340740/ebbcf1ea-33c5-406f-8652-5955bef22ade.png)](https://hubspot-cta-redirect-na2-prod.s3.amazonaws.com/cta/redirect/46340740/ebbcf1ea-33c5-406f-8652-5955bef22ade) --- *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 registered as an investment advisor with the SEC and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. Information presented on this program is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. Discussions and answers to questions do not involve the rendering of personalized investment advice, but are limited to the dissemination of general information. A professional advisor should be consulted before implementing any of the options presented.*   [Dan Blair](https://blog.hwtaxstrategies.com/insights/author/dan-blair) Daniel Blair is the Founder, CEO, and CCO of Horizon Wealth and HW Tax Strategies. With a deep commitment to helping affluent individuals, business owners, and entrepreneurs preserve and grow their wealth, Dan leads his firms with a focus on engineering smart solutions to complex tax challenges. His approach centers on mitigating and deferring taxes through innovative strategies tailored to each client’s unique financial landscape. Guided by a strong faith in God, Dan believes we are all called to be good stewards of the resources entrusted to us. This belief inspires a mission-driven approach to financial planning and tax strategy. His passion lies in empowering clients to maintain and expand their wealth through thoughtful, strategic tax solutions. Topics: [Tax](https://blog.hwtaxstrategies.com/insights/topic/tax) Don't forget to share this post: ## Related Articles ### [![](https://blog.hwtaxstrategies.com/hs-fs/hubfs/AdobeStock_1027455598.jpeg?width=8023&height=4012&name=AdobeStock_1027455598.jpeg) Tax-Efficient Strategies for Highly Appreciated Investment Portfolios August , 2025|5 min read](https://blog.hwtaxstrategies.com/insights/tax-efficient-strategies-investment-portfolios) Location 650 South Cherry St. Suite 825 Denver, CO 80246 Phone: [(303) 777-7124](tel:+13037777124) Quick Links - [About](https://hwtaxstrategies.com/about) - [Strategy](https://hwtaxstrategies.com/strategy) - [Services](https://hwtaxstrategies.com/services) - [Resources](https://blog.hwtaxstrategies.com/insights) - [Contact Us](https://hwtaxstrategies.com/contact-us) - [Form CRS](https://blog.hwtaxstrategies.com/hubfs/EBook/Horizon%20Wealth%20Form%20CRS%20Sept%202025.pdf) - [Terms & Privacy Policy](https://hwtaxstrategies.com/terms-and-privacy-policy) Connect With Us - [Facebook](https://www.facebook.com/people/Horizon-Wealth/61561017926430/) - [Linkedin](https://www.linkedin.com/company/hwtaxstrategies/) - [Youtube](https://www.youtube.com/@HWTaxStrategies) © 2026 HW Tax Strategies All Rights Reserved. © 2026 HW Tax Strategies. All Rights Reserved. Important Disclosures Investment advisory services are offered through Horizon Wealth, a Registered Investment Adviser. Registration does not imply a certain level of skill or training. Information provided by HW Tax Strategies, including through this website and associated links, is for informational and educational purposes only and should not be construed as an offer or solicitation to purchase or sell any security or as personalized investment, legal, accounting, or tax advice. Investment, financial planning, and tax strategies may not be appropriate for every individual. Clients should consult appropriate investment, tax, legal, and other professionals regarding their specific circumstances before implementing any strategy. Investment Risks All investments and investment strategies involve risk, including potential loss of principal, and no strategy can guarantee a profit or protect against loss. Unless specifically stated otherwise, investments are not guaranteed or insured. Investment results may be affected by market conditions, interest rates, economic conditions, liquidity, tax considerations, legislative or regulatory developments, and other factors. Financial or tax-planning strategies may require the purchase, sale, retention, concentration, or restructuring of investments and may create additional risks, including reduced liquidity, restricted access to assets, longer holding periods, concentration risk, transaction costs, and other financial consequences. Clients should consider both potential tax benefits and the investment risks and economic consequences before proceeding. Past performance is not indicative of future results. No representation is made that any investment or strategy will achieve its objectives or that clients will experience results similar to those presented in examples, illustrations, or educational materials. Tax and Planning Risks Tax laws and regulations are complex, subject to differing interpretations, and may change. Tax-related strategies depend upon a client's individual circumstances and applicable laws, regulations, administrative guidance, and judicial decisions. There is no assurance that any strategy will reduce, defer, or eliminate taxes or achieve an anticipated tax result. A tax or financial planning strategy may be challenged, modified, limited, or disallowed by the Internal Revenue Service, state or local taxing authorities, courts, or other governmental authorities. Certain strategies may increase the likelihood of additional scrutiny or an audit and could result in additional taxes, interest, penalties, professional fees, or other costs if the intended tax treatment is not accepted. Changes in tax laws, regulations, interpretations, or a client's circumstances may adversely affect a strategy after implementation. Strategies appropriate under current law may become less advantageous, unavailable, or subject to different tax treatment. Strategies may also involve significant implementation or ongoing expenses, including legal, accounting, valuation, administrative, investment management, custodial, insurance, trustee, filing, or other professional fees. These costs should be considered in evaluating a strategy's potential benefits. Client Responsibilities and Professional Advice Implementation and maintenance of financial and tax strategies may require accurate and timely information from the client, ongoing participation, execution of documents, adherence to deadlines, and coordination among the client's investment adviser, accountant, attorney, insurance professional, and other advisers. Failure to provide complete information or timely complete required actions may reduce a strategy's effectiveness or result in unintended financial or tax consequences. 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Projections, illustrations, estimates, and examples are hypothetical unless otherwise indicated and are not guarantees of future investment performance, tax savings, or financial results. Actual results may differ materially from those anticipated. Clients should evaluate strategies based on their objectives, financial circumstances, risk tolerance, liquidity needs, tax situation, and other relevant considerations and consult appropriate investment, tax, accounting, and legal professionals before implementation. 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