Installment Sales, Seller Notes, and the Other DST: Spreading the Tax Without Handing Over Control
An installment sale under Section 453 lets you recognize capital gain as payments are received across multiple tax years, which can keep a large sale out of the top bracket and out of a single-year net investment income tax spike. The tradeoff is real: depreciation recapture is generally taxed in the year of sale regardless, and if you take back a note you are the lender, meaning the buyer’s default becomes your problem on a property you no longer control. Skip The Agent buys direct for cash, which is the opposite structure, and this piece exists so you can weigh both honestly before you sign anything.
Before the first paragraph, one thing needs to be said plainly. This is tax content, and none of it is personal tax advice. Every scenario below turns on your basis, your holding period, your state, your entity structure, and details only your own CPA can see. For anything resembling a Deferred Sales Trust, you need independent counsel who is not connected to the promoter selling it to you. That last sentence matters more than any figure in this article.
The Two Things Abbreviated DST, and Why Owners Confuse Them
There are two structures in commercial real estate that get abbreviated DST, and they are not related.
A Delaware Statutory Trust is a specific IRS-recognized ownership structure that qualifies as replacement property in a 1031 exchange. Revenue Ruling 2004-86 blessed it. Institutional sponsors syndicate fractional interests in stabilized assets, and 1031 sellers who cannot find a suitable replacement property inside the 45-day identification window use it as a landing pad. We covered how that works in Delaware Statutory Trusts and Opportunity Zones: The Two Exits When Your 1031 Will Not Close.
A Deferred Sales Trust is something else entirely. It is a promoted arrangement built on installment sale treatment, sold by a small number of promoters, and structured around a third-party trust that buys your property, sells it to the end buyer, and pays you over time. The marketing pitches it as a way to defer capital gains without the 45-day and 180-day 1031 clock. The IRS has scrutinized these arrangements and related monetized installment sale structures aggressively, and any owner considering one needs tax counsel who has no financial relationship with the promoter. We will get to why later. For now, understand that when a promoter says “DST,” they may mean either one, and the two carry completely different risk profiles.
The rest of this article is about the ordinary, boring, widely used version: the Section 453 installment sale. That is the one most readers should actually consider.
1. The Ordinary Installment Sale Under Section 453
The ordinary installment sale is a Section 453 election that lets you report gain from a sale as you receive payments, rather than all in the year of sale. If you sell a $3 million property and receive $600,000 per year across five years, you generally recognize a proportional slice of the gain each year. IRS Publication 537 walks through the mechanics, and IRS Topic 705 summarizes the basics.
Why does that matter? Because the federal tax code is progressive, and a large lump-sum gain can push you into brackets and surcharges you would otherwise avoid. Long-term capital gains sit in 0%, 15%, and 20% federal brackets depending on total taxable income, and the 3.8% net investment income tax kicks in above defined thresholds. Confirm the current brackets and NIIT threshold against IRS Topic 409 on capital gains with your CPA before you plan around them, because the numbers shift.
A Worked Example
Assume you are selling a small multifamily property in Texas. Contract price is $3,000,000. Your adjusted basis, after years of depreciation, is $1,000,000. Ignore recapture for a moment (we will get to it, and it is the trap). Your gain is $2,000,000.
Scenario A: Full cash sale in one year. The entire $2 million lands on your return in a single tax year. Combined with your other income, most of that gain likely sits in the 20% long-term capital gains bracket, and the full amount is subject to the 3.8% NIIT because you are well above the threshold. Rough federal tax exposure on the gain alone: around $476,000, before state tax and before recapture.
Scenario B: Installment sale, $600,000 per year for five years. You recognize roughly $400,000 of gain per year. Depending on your other income, a meaningful portion of that annual gain may fall into the 15% bracket instead of 20%, and you may stay under or barely over the NIIT threshold in some years. The total federal tax on the gain can be materially lower, and the cash outflow is spread across five tax years instead of one.
Numbers are illustrative and simplified. Your CPA runs the real math against your actual return. The point is directional: spreading the gain across years you actually receive payments can meaningfully reduce total tax, especially for owners whose baseline income is modest and who would only touch the top bracket because of a single large sale.
2. What an Installment Sale Does Not Defer
Here is the trap, and it catches owners who ran a cost segregation study.
Depreciation recapture is generally recognized in the year of sale, not spread across the installment payments. Section 1245 recapture on personal property (the assets your cost seg study broke out and depreciated fast) is fully taxable up front. Section 1250 unrecaptured gain on real property is taxed at up to 25% and, while it is included in installment reporting, the mechanics can accelerate it in ways that surprise sellers.
If you accelerated depreciation using a cost segregation study, you got real cash flow benefits during the hold. On exit, those benefits reverse, and an installment sale does not soften that piece. We walked through the full mechanics in Cost Segregation in 2026: What It Saves You Now, and What It Costs You When You Sell. Read it before you assume an installment sale solves your recapture problem, because it does not.
A Section 453 installment sale spreads capital gain recognition across the years you receive payments, but depreciation recapture is generally taxed in the year of sale regardless. Owners who claimed accelerated depreciation through a cost segregation study cannot defer that recapture piece by taking back a note.
3. Seller Financing: The Practical Form Most Installment Sales Take
For a commercial owner, an installment sale almost always shows up as seller financing, also called a carryback note. The buyer puts down a portion of the price, and you hold a mortgage on the property for the balance at an agreed interest rate over an agreed term.
Common structures land somewhere around 20% to 30% down, 6% to 8% interest depending on rate environment and buyer credit, and amortization of 20 to 25 years with a balloon in five to ten. Terms vary widely by asset, buyer, and how motivated each side is.
We covered the mechanics of seller carryback structures, why they exist in this rate environment, and the risks of becoming the lender in detail here: Commercial Real Estate Financing in 2026: What a Deal Actually Requires, and What to Do When the Debt Will Not Come Together. That piece walks through note structure, personal guarantees, subordination, and what to insist on when you are the bank. Rather than repeat it, read it in tandem with this one.
The relevant point for the tax discussion: seller financing is what makes an installment sale actually happen. Without a note, you are not receiving payments across years, and Section 453 does not apply. The tax election and the financing structure move together.
4. The Real Risk: You Are Now the Lender
This is the part promoters of installment sale structures gloss over, and it matters more than any tax savings.
When you hold a note on a property you no longer control, three things become true at once. First, the buyer’s operational decisions are entirely their own. Deferred maintenance, tenant turnover, insurance lapses, tax delinquency, all of it happens on their watch. Second, if the buyer defaults, your remedy is foreclosure. Foreclosure is a legal process, it takes months, and it costs money. Third, if you do foreclose, the asset that comes back to you is not the asset you sold. It has been operated by someone who ran into trouble, which usually means it has lost value.
The worst outcome from a seller carryback is not that you lose the note. It is that you get the property back in a materially worse condition, at a lower market value, in a rate environment where refinancing is harder, and now you are running an asset you sold specifically because you wanted out of the business. Owners who took a note to escape management fatigue can end up back in the exact situation they were trying to leave.
That is not a reason to avoid installment sales. It is a reason to price the risk. Underwrite the buyer the way a bank would. Require financial statements, tax returns, operating history on similar assets, and a meaningful down payment. Get a personal guarantee. Do not carry paper for someone you would not lend to if this were your day job.
5. The Deferred Sales Trust: Skepticism Warranted
Now to the arrangement that shares an acronym with the 1031 vehicle and shares almost nothing else.
A Deferred Sales Trust is a promoted structure marketed as a way to defer capital gains tax without the constraints of a 1031 exchange. The general mechanics: a third-party trust buys your property using an installment note payable to you, then sells the property to the actual end buyer for cash. You receive payments from the trust over time, and the promoters argue this qualifies as an installment sale under Section 453.
The IRS has scrutinized monetized installment sale arrangements aggressively, and has taken action to identify certain of these structures as listed transactions requiring disclosure. There is case law and administrative guidance on related structures that any tax attorney working in this area should already know. The specific guidance and current IRS posture change, and rather than link to a document I cannot verify resolves today, the right move is this: before you sign anything resembling a Deferred Sales Trust, retain a tax attorney with no financial relationship to the promoter, and ask them for the current IRS position in writing.
That last part is not throwaway advice. The promoters of these structures often have preferred attorneys and accountants they refer clients to. Those professionals are being paid, directly or indirectly, in relationship to the promoter. That is a conflict, and it does not go away because everyone is polite about it. Find your own counsel.
The ordinary Section 453 installment sale, done between you and an arm’s-length buyer with a straightforward carryback note, is boring, well-established, and used every day in commercial real estate. The Deferred Sales Trust is a different animal, and the risk profile is different. Do not confuse the two because they share three letters.
6. The Structured Installment Sale: A Third Variant
A structured installment sale typically uses a third-party assignment company to fund the future payments through an annuity or similar instrument. The idea is that you get installment tax treatment with the payment stream backed by a rated insurance carrier rather than by the buyer’s ability to keep operating the property.
These are more common in business sales and personal injury settlements than in commercial real estate transactions, and they carry their own tax and structural considerations. If a promoter offers you one on a commercial property sale, the same rule applies: independent counsel, not the promoter’s referral.
7. The Honest Comparison Against the Alternatives
Every seller with a large gain has four practical options, and each one solves a different problem.
A 1031 exchange defers the entire gain, including recapture, if you roll into qualifying replacement property. It demands you identify replacement property within 45 days and close within 180. That clock is unforgiving. We covered exactly what happens when it runs out in The 1031 Exchange Clock: What the 45 and 180 Day Deadlines Cost You If You Miss Them.
An Opportunity Zone election shelters eligible capital gain if you reinvest into a Qualified Opportunity Fund within 180 days and hold for the required period. It only touches the capital gain piece, and the program’s terms have shifted since inception. It works for the right sellers with the right time horizon, and not for others.
An installment sale spreads the tax across payment years, potentially lowering the total federal bill, but it does not defer recapture in the year of sale and it leaves you exposed to a buyer for the term of the note.
Paying the tax in full at closing ends the matter. You take the hit, keep the cash, and owe nothing to anyone. In some cases, especially when the gain is modest or the buyer is anyone other than an institutional counterparty, that is the right answer.
There is no universally correct choice. There is only the one that fits your basis, your liquidity needs, your risk tolerance, and your life at this specific point.
Where a Direct Cash Sale Fits
Skip The Agent buys commercial property direct for cash. That is the opposite of an installment sale. Cash closes fast, ends your exposure to the asset and the buyer, and triggers the tax in the year of sale. An installment sale defers some tax and keeps you tied to the buyer for years.
Neither is universally better. If your gain is large, your baseline income is modest, and you are comfortable holding paper on someone you have underwritten carefully, an installment sale can meaningfully reduce your total tax. If your priority is a clean exit, no ongoing exposure, and the ability to redeploy or retire without watching an asset you no longer own, cash makes more sense.
Owners we talk to often want to weigh both. That is what the sellers page exists for. We will walk through what a cash offer looks like against your numbers, show you the math the same way we would show any owner, and if an installment sale or a 1031 or something else fits your situation better, we will say so. The offers we make are grounded in market comps and cap rates on your actual asset. If the numbers do not work for you, they do not work, and there is no pressure to make them.
If you want to have that conversation, reach out here.
Frequently Asked Questions
What is the difference between a Delaware Statutory Trust and a Deferred Sales Trust?
A Delaware Statutory Trust is an IRS-recognized ownership structure that qualifies as replacement property in a 1031 exchange, blessed by Revenue Ruling 2004-86 and used by institutional sponsors to hold fractional interests in stabilized commercial real estate. A Deferred Sales Trust is an entirely separate promoted arrangement built on installment sale treatment, sold by a small number of promoters, and it has been subject to significant IRS scrutiny. The two share only an acronym, and confusing them can lead to serious tax exposure, so any owner considering either should verify which structure the promoter is actually offering.
Is a Deferred Sales Trust IRS approved?
No, a Deferred Sales Trust is not IRS approved in the way that a 1031 exchange or a Delaware Statutory Trust is approved. It is a promoted arrangement that relies on installment sale treatment under Section 453, and the IRS has scrutinized monetized installment sale structures aggressively. Before signing anything resembling a Deferred Sales Trust, retain independent tax counsel who has no financial relationship with the promoter offering it to you.
How does a Section 453 installment sale reduce capital gains tax?
A Section 453 installment sale reduces capital gains tax by spreading gain recognition across the years payments are received, which can keep a large sale from pushing all the gain into the top long-term capital gains bracket and the 3.8% net investment income tax in a single year. On a $2 million gain, spreading recognition across five years can meaningfully lower the total federal tax bill compared with recognizing everything at closing. The relief applies to capital gain only, not to depreciation recapture, which is generally taxed in the year of sale regardless.
If I take back a seller note, what happens if the buyer defaults?
If the buyer defaults on a seller-financed note, your remedy is foreclosure, which is a legal process that takes months and costs money, and the property that comes back to you is usually in worse condition than when you sold it. This is the most underdiscussed risk in installment sale structures: you can end up owning and operating an asset you specifically sold to escape, in a market environment that may be worse than the one you sold into. Underwrite the buyer the way a bank would, require a meaningful down payment and a personal guarantee, and price the risk into the note terms.
Does an installment sale defer depreciation recapture?
No, depreciation recapture is generally taxed in the year of sale even when the transaction is structured as an installment sale, so an owner who ran a cost segregation study cannot spread that piece across payment years. Section 1245 recapture on personal property is fully taxable up front, and Section 1250 unrecaptured gain on real property is taxed at up to 25% with mechanics that can accelerate recognition. Confirm the exact treatment with your CPA against your specific depreciation schedule before assuming an installment sale defers your full tax bill.
When does a cash sale make more sense than an installment sale?
A cash sale makes more sense when your priority is a clean exit with no ongoing exposure, when the buyer you would otherwise finance is not one you would lend to as a bank, or when the tax savings from spreading the gain do not outweigh the risk of holding paper on the property for five to ten years. Cash triggers the full tax in the year of sale, but it ends your exposure to the asset, the buyer, and the ongoing operational risk. For owners exiting because of management fatigue, estate planning, or retirement, that certainty often matters more than the marginal tax savings an installment structure would produce.
Written by Addai Lewellen and Grant Umali, co-founders of Skip The Agent LLC. Addai brings deep experience in commercial real estate acquisitions and deal structuring across national markets. Grant leads operations, marketing, and investor relations. They handle every commercial deal personally — reach them at skiptheagent.llc/commercial or (574) 702-1622.
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