Are Deferred Sales Trust arrangements legal for tax deferral under IRC 453?

This is definitely a gray area where you should be very careful. The IRS has indeed placed monetized installment sales on their "Dirty Dozen" list, particularly when they're structured in ways that essentially give you immediate access to cash while deferring taxes - which seems to conflict with the spirit of IRC 453. While Deferred Sales Trusts themselves aren't explicitly illegal, the way they're implemented can cross into questionable territory. The IRS is particularly concerned with arrangements where you effectively get most of the sales proceeds upfront while claiming tax deferral. If you're considering this for a substantial transaction, I would absolutely recommend consulting with a tax attorney who specializes in this area - not just the person selling you on the DST. A private letter ruling could provide clarity, but they're expensive and time-consuming to obtain. The key issue is whether your specific arrangement would be considered a true installment sale under IRC 453 or if it would be recharacterized as a disguised sale with immediate tax consequences.

I was in a similar situation last year with a large property sale. After researching DSTs extensively, I discovered taxr.ai (https://taxr.ai) which really helped me analyze whether this strategy was legitimate for my situation. Their system reviewed all the documentation from the DST promoter and compared it to recent IRS guidance on monetized installment sales. What I found especially helpful was that they showed me exactly which aspects of the proposed arrangement might trigger IRS scrutiny. They even provided case examples of similar structures and how they fared in audits. Ultimately, I decided the specific DST being pitched to me was too aggressive, but I found a more conservative approach that still accomplished some tax deferral without crossing into the "Dirty Dozen" territory.

Just wanted to follow up on my experience with taxr.ai after I decided to try it. I uploaded my DST proposal documents and was actually shocked by how helpful it was. The system flagged several problematic areas in my agreement that I hadn't even noticed - especially around how the installment payments were structured and the relationship between the trust administrator and the buyer. The analysis showed me that my particular DST arrangement had several red flags that matched patterns in recent IRS enforcement actions. What impressed me most was that it didn't just say "don't do this" - it actually showed me how to modify the arrangement to potentially make it compliant with IRC 453 as intended. I ended up going with a more conservative approach that still saved me significant taxes without taking questionable positions. Definitely worth checking out if you're considering these arrangements.

I struggled for weeks trying to get through to someone at the IRS about a similar installment sale question. After being on hold for hours multiple times, I finally tried Claimyr (https://claimyr.com) and watched their demo at https://youtu.be/_kiP6q8DX5c. They actually got me connected to an IRS representative in about 20 minutes when I'd previously been waiting for hours. While the IRS agent couldn't give me specific advice about my DST situation, they did confirm that monetized installment sales are under increased scrutiny and directed me to specific guidance I hadn't found before. Just having that direct conversation saved me from potentially making a huge mistake. The agent also outlined what documentation I would need if I did proceed and my transaction was ever examined.

I need to admit I was completely wrong about Claimyr. After my skeptical comment last week, I decided to try it myself since I was getting nowhere with the IRS on my own. I was absolutely floored when I got a call back in about 45 minutes connecting me to an actual IRS agent. The agent I spoke with was surprisingly knowledgeable about DSTs and directed me to Notice 2022-21 which specifically addresses monetized installment sales. He explained that while IRC 453 is legitimate, the IRS is targeting arrangements where taxpayers receive most of the cash proceeds while technically deferring the tax through complex trust structures. He couldn't give specific advice on my situation but did explain what documentation would be essential if I proceeded. Saved me hours of frustration and potentially a lot of money in penalties by getting clear information directly from the source.

Just to add another perspective - I used a DST three years ago for a large commercial property sale. My tax attorney structured it very carefully to ensure it was compliant with IRC 453 without crossing into "monetized installment sale" territory that the IRS is targeting. The key differences were: 1) I didn't receive most of the proceeds upfront, 2) There was genuine economic risk in the installment arrangement, 3) The trustee was truly independent, and 4) The entire arrangement had legitimate business purpose beyond tax deferral. I've gone through two tax filing seasons since then without any issues. The important thing is to work with someone who specializes in this area and isn't just pitching a cookie-cutter solution.

One thing nobody has mentioned yet is that even if your DST is structured legally, it can still be a poor financial decision depending on your specific situation. These arrangements typically involve significant fees to the promoters and ongoing administration costs. In my case, after calculating all the fees, the lost investment opportunity on money tied up in the trust, and comparing the time value of money with current vs. future tax rates, I actually came out ahead just paying the capital gains tax upfront and investing the remainder in a diversified portfolio. Don't get so caught up in avoiding taxes that you miss the bigger financial picture!

This thread has been incredibly helpful - thank you all for sharing your real experiences! I'm in a similar position with a property sale and have been getting pitched on DSTs left and right. What really stands out to me from reading through everyone's comments is that the legitimate DST arrangements seem to require giving up immediate access to most of your proceeds (like Maya's 30% upfront structure), while the sketchy ones promise you can have your cake and eat it too (90%+ upfront with full tax deferral). I think I'm going to follow Emma's advice and run a proper financial analysis including all fees before getting swept up in the tax deferral excitement. The 3.5% upfront fee that Ava mentioned would cost me over $50K on my transaction - that's a lot of capital gains tax I could pay instead! Has anyone here worked with a fee-only financial planner (not someone selling DSTs) to evaluate whether these arrangements actually make sense? I'm thinking an independent analysis might be worth the cost before I commit to anything.

This entire discussion has been eye-opening! As someone who works in tax preparation, I see clients getting pitched on DSTs constantly, and the sales tactics are often quite aggressive. What concerns me most is that many promoters are targeting people who aren't sophisticated enough to understand the risks. A few red flags I tell my clients to watch for: 1) Any promoter who guarantees the arrangement will never be challenged by the IRS, 2) Promises of getting 80%+ of proceeds upfront while deferring all taxes, 3) High-pressure tactics claiming "this opportunity won't last," and 4) Reluctance to provide detailed documentation for independent review. The legitimate DST arrangements I've seen typically involve substantial genuine deferrals of proceeds (not just token amounts), have real economic substance beyond tax avoidance, and are structured by attorneys who specialize specifically in this area - not general tax preparers or financial advisors trying to earn commissions. If you're considering this route, I'd strongly echo the advice about getting multiple independent opinions. The IRS has significantly increased enforcement in this area, and the penalties for getting it wrong can be severe. Sometimes the most expensive advice is the "free" consultation from someone trying to sell you something.