Reduce Your Tax Liability with a 453 Trust

If you have a high-value asset that you want to sell, you may worry about how capital gains taxes will reduce the amount of money you actually receive. Fortunately, various legal strategies may help reduce or defer tax liability, including selling an asset through a structure commonly referred to as a 453 trust.

A 453 trust — also called a deferred sales trust — is designed to rely on the installment sale provisions of Internal Revenue Code §453, which may allow capital gains taxes to be deferred over multiple years rather than recognized all at once. However, these arrangements must be carefully structured to comply with IRS rules and applicable tax laws, making it essential to work with experienced legal and tax counsel.

At 453 Trust Powered by Pennington Law, we want to help you enjoy the advantages of using a 453 trust to reduce your tax burden when selling real estate, businesses, or high-value assets. Our national practice of seasoned professionals advises clients across a wide range of matters, including tax law, asset protection, estate planning, and trusts.

Firm founder Andre Pennington has earned client trust and recognition from publications such as The New York Times, USA Today, The Wall Street Journal, and Forbes, as well as honors from Super Lawyers, Lawyers of Distinction, and Best Attorneys in America. Our firm has built an IRS-compliant program under one roof to provide you with comprehensive service, rather than outsourcing aspects of your case to outside professionals. Contact us now for an initial consultation to learn how you can potentially benefit from The Tax Tool You Didn’t Know You Had — a 453 trust.

Step-by-Step Process for Using a 453 Trust to Lower Your Tax Burden

There are multiple steps to selling an appreciated asset through a 453 trust:

• Establish an irrevocable, non-grantor trust – The trust must have an independent fiduciary serve as trustee.
• Sell assets as an installment sale – The owner sells their assets to the trust in exchange for an installment agreement. The contract specifies the terms under which the trust will pay the sale proceeds to the owner in installments over multiple years. The trust then sells the asset to an unrelated, bona fide third-party buyer not previously arranged or controlled by the owner.
• IRS reporting and taxation – The seller reports payments received from the trust to the IRS and pays capital gains taxes only on the amounts received in the tax year they are received. If the seller receives any interest income from the trust, they report and pay tax on that income as well. The trust pays taxes on any interest income it retains. For certain installment obligations exceeding $5 million, the seller may also be required to pay annual interest to the IRS on the deferred capital gains tax under applicable tax rules.

How a 453 Trust Reduces Capital Gains Tax on High-Value Asset Sales

By selling an asset through a 453 trust, a seller can avoid paying the entire capital gains tax upfront. Instead, capital gains taxes are deferred over time, with tax owed only on the portion of sale proceeds received in each tax year. This approach can spread the tax burden of an asset sale over multiple years and help reduce the impact of a large one-time tax liability — particularly when an upfront sale would push the seller into a higher long-term capital gains tax bracket. For high-net-worth individuals selling high-value assets, distributing capital gains tax payments over multiple years can offer meaningful tax-planning flexibility.

How a 453 Trust Provides Tax Relief for Retiring or Exiting Business Owners

Business owners who wish to retire or exit the companies they built may face a substantial tax bill when selling to a new owner or strategic partner, particularly if the business has significantly appreciated. Through the installment structure of a 453 trust, business owners can defer capital gains taxes over multiple years rather than paying the full amount in a single tax year.

In addition, periodic payments made through a 453 trust can provide a predictable income stream in retirement, allowing former business owners to gradually access the value of their business while managing the timing of their tax obligations. 

Reducing Tax Liability on Real Estate Sales with a 453 Trust

A 453 trust can be an alternative way to manage tax liability from real estate sales, but it is not the only available tax-reduction strategy. Similar to an installment sale or a 1031 exchange, a 453 trust allows a seller to defer capital gains taxes rather than paying them in full in the year of sale. However, 453 trusts may offer greater flexibility than 1031 exchanges, which are subject to strict rules regarding qualifying property, reinvestment timelines, and how sale proceeds must be used.

Another potential advantage of a 453 trust is that sale proceeds are held in a trust structure that may provide asset protection features, depending on how the trust is drafted and administered. This structure can reduce reliance on the buyer’s ongoing performance, unlike traditional installment sales, which may expose the seller to greater risk of buyer default.

Using a 453 Trust to Maximize Wealth Preservation After a Major Sale

A 453 trust can help preserve more of your wealth after selling a major asset. Rather than paying the full capital gains tax in the year of sale, a properly structured 453 trust allows the sale proceeds to be paid to you over time under an installment arrangement. The trust may invest those proceeds in an annuity that provides a predictable income or in other permitted investments.

By selling an asset through a 453 trust, you can stagger capital gains tax payments over multiple years and pay tax only as proceeds are received, instead of paying the entire tax bill when you file your return for the year of the sale. 

Contact Us Today to Learn How a 453 Trust Could Reduce Your Tax Bill

Before making decisions on the sale of your property, ask a knowledgeable attorney about a Section 453 tax deferral strategy that could reduce your tax exposure and provide potential wealth growth.  Contact 453 Trust Powered by Pennington Law today for a free consultation.