Virginia Installment Sales Trust (IST)™ Lawyers

A Strategic Alternative to the 1031 Exchange

Do you want to exit highly appreciated real estate without being locked into the 1031 exchange cycle? Would you prefer flexibility in how sale proceeds are invested and integrated into your broader estate and tax planning rather than being forced to acquire another “like-kind” property under strict IRS deadlines? An Installment Sales Trust (IST)™ may provide an alternative legal strategy for deferring capital gains taxes on the sale of appreciated commercial or residential real estate while allowing for greater planning flexibility and risk management.

Significant capital gains can erode the value of a successful sale if planning is not handled strategically. Whether you are selling real estate, a closely held business, or appreciated investments, thoughtful structuring can make a meaningful difference in your long-term financial outcome. With over two decades of experience, the attorneys at J S Burton, PLC guide Virginia clients through sophisticated tax and estate planning techniques designed to preserve wealth and create flexibility. Our approach emphasizes client-focused care and personalized service, recognizing that no two transactions—or families—are the same. Through boutique, holistic legal representation, we look beyond the immediate tax event and consider how each decision supports your broader legacy goals. You can begin the process with a free, no obligation initial estate or business planning consultation to better understand your options.

For experienced guidance, turn to a skilled IST attorney. Contact us or call (888) 885-9001 to secure a free initial consultation.

The Limitations of the Traditional 1031 Exchange

Many real estate owners are familiar with the 1031 exchange as the primary method for deferring capital gains taxes. While effective in certain circumstances, a 1031 exchange requires:

• Identification of replacement property within 45 days
• Closing within 180 days
• Reinvestment exclusively into like-kind real estate
• Continued exposure to the real estate market and management risk

For some sellers, these constraints limit liquidity, diversification, and long-term planning options.

Property owners also discover that the timelines for a 1031 exchange can clash with real-world conditions, such as shifting interest rates, limited inventory, or delays in commercial lending. When you are under pressure to identify and close on replacement property within fixed windows, it can be difficult to negotiate favorable terms or conduct thorough due diligence. In some cases, taxpayers feel forced into purchasing a property that does not align with their long-term objectives simply to preserve the ability to defer capital gains.

There may also be portfolio considerations that make repeating the 1031 cycle less attractive, particularly as owners approach retirement or want to reduce hands-on management. Continuing to accumulate additional properties can increase exposure to tenant risk, maintenance obligations, and localized market downturns. For clients in Virginia who have built substantial wealth in a single region or asset class, it can be prudent to consider a capital gains tax deferral strategy that allows a gradual transition away from active real estate ownership.

Legal Foundation of the Installment Sales Trust

The Installment Sales Trust is grounded in the federal installment sale rules under Internal Revenue Code § 453, which permit capital gains taxes to be deferred when sale proceeds are received over time rather than in a single lump sum. Under § 453, capital gain is generally recognized proportionately as installment payments are received, allowing the seller to spread tax liability over multiple years, subject to proper structuring and compliance.

In practice, § 453 treatment requires careful attention to how the sale is documented, how the installment obligation is structured, and how interest and principal are allocated. The IRS distinguishes between gain attributable to principal payments and ordinary income, such as interest, and those differences affect the taxpayer’s annual reporting obligations. When an Installment Sales Trust is involved, the sale and the trust structure must be aligned so that the underlying transaction qualifies as an installment sale rather than a disguised cash sale, which is why coordination with experienced legal and tax counsel is essential.

For clients in Virginia and Washington, D.C., the federal rules under § 453 interact with state income tax systems and any applicable local requirements. While the Installment Sales Trust framework is based on federal law, the way payments are reported at the state level can influence net after-tax results over time. We help clients evaluate how an Installment Sales Trust fits within their broader planning, including state income taxes, potential alternative minimum tax considerations, and the timing of income recognition in years when other significant financial events may occur.

Traditional Installment Sale vs. Installment Sales Trust

In a traditional installment sale, the buyer pays the seller directly over time pursuant to an installment note. While this defers capital gains taxes, it exposes the seller to significant buyer-related risks, including default, insolvency, or bankruptcy. Enforcement options may be limited and costly.

An Installment Sales Trust (IST)™ replaces reliance on the buyer with a third-party trust structure, providing additional safeguards and greater planning flexibility.

Because the IST™ separates the buyer from the seller through an independent trust, it can be designed to hold a diversified pool of assets rather than a single promissory note from the purchaser. This structure may allow for professional management of trust investments and the ability to adjust the investment mix over time in response to changing markets or personal circumstances. For many real estate owners considering how to defer capital gains tax on real estate, this additional layer of flexibility and risk management is a key difference from a standard buyer-seller installment note.

We also work with clients to assess the creditworthiness of purchasers and the terms of any underlying sale, because even when an Installment Sales Trust is used, the economics of the initial transaction remain important. The trust can be tailored so that payment schedules, interest rates, and security interests align with the client’s income needs and risk tolerance. By modeling various payment structures, we can help clients compare a traditional installment sale to an IST™ approach and understand how each strategy may affect cash flow, tax exposure, and long-term wealth preservation.

How an Installment Sales Trust (IST)™ Works

An IST™ is typically structured as follows:

• The property is sold to an unrelated third-party buyer.
• Sale proceeds are transferred to an independent trust.
• The trust issues an installment note to the seller.
• The trust makes scheduled installment payments over time.
• Trust assets may be invested in accordance with an agreed-upon strategy.

The IST™ can be customized to address payment timing, duration, and coordination with estate planning objectives. Throughout the life of the trust, legal, tax, and financial professionals work together to help ensure proper administration and compliance.

When we evaluate an IST™ for a client, we begin by clarifying goals such as desired retirement income, charitable intentions, and family wealth transfer priorities. Those objectives inform key design choices, including whether payments should be level over the life of the note or structured to increase or decrease at certain milestones. The trust can also be drafted to coordinate with existing revocable trusts or business succession plans so that the Installment Sales Trust becomes one component of a comprehensive deferring capital gains strategy rather than a stand-alone transaction.

Ongoing administration is just as important as the initial setup. The trustee must track payments, allocate principal and interest correctly, and provide appropriate reporting to the grantor and tax advisors each year. For clients who own property in different jurisdictions, including Virginia, Washington, D.C., and other states, the trustee may also need to account for variations in state tax rules and withholding requirements. Our role typically includes periodic review of the IST™ structure over time to confirm that it continues to serve the client’s needs as laws and personal circumstances evolve.

Comparison of Common Strategies

Estate and Legacy Planning Considerations

An Installment Sales Trust is often evaluated in conjunction with broader estate planning strategies, including revocable trusts, dynasty trusts, asset protection planning, and intergenerational wealth transfer.

In many cases, the installment note may pass to beneficiaries at death and—depending on overall estate planning and applicable tax law—may reduce or eliminate future estate tax exposure.

Because the installment note is an asset of the seller’s estate, we consider how it will interact with existing wills, revocable living trusts, and any lifetime gifting plans. The note can be specifically addressed in governing documents so that responsibility for receiving payments, filing tax returns, and coordinating with advisors is clearly assigned. For families with multiple beneficiaries, it may be appropriate to divide the note’s economic benefits among several trusts, which can help tailor distributions and asset protection features for each individual’s circumstances.

In higher net worth situations, an Installment Sales Trust may be combined with irrevocable trusts designed to remove appreciation from the taxable estate while still providing access to cash flow for family members. We frequently work with clients in Virginia to integrate IST™ planning with strategies such as spousal lifetime access trusts, charitable entities, or family limited liability companies. Taking this integrated approach allows clients to align their capital gains tax deferral strategy with long-term legacy goals, including support for children, grandchildren, and charitable causes.

Who May Benefit From an Installment Sales Trust™

An IST™ may be appropriate for individuals who:

• Own highly appreciated commercial or residential real estate
• Wish to defer capital gains taxes without reinvesting in real estate
• Are concerned about buyer default in a traditional installment sale
• Seek to integrate real estate exits into long-term estate planning

An IST™ is not appropriate for every transaction and should be evaluated on a case-by-case basis.

We typically see Installment Sales Trusts considered by owners who have held property for many years and are facing substantial capital gain if they sell in a single taxable year. This can include landlords who want to transition out of active management, business owners selling property used in their operations, or families consolidating inherited real estate interests. For these clients, an IST™ offers a way to shape the timing and amount of income received after a sale, which can be particularly helpful when coordinating with retirement, Social Security, or other income sources.

Another group that may benefit from this approach includes Virginia and Washington, D.C. residents who are relocating, downsizing, or diversifying away from a concentrated position in a single property or market. Rather than cycling into another like-kind exchange, they may prefer a 1031 exchange alternative that permits broader investment choices while still managing the impact of capital gains over time. During an initial consultation, we help clients explore whether their goals, risk tolerance, and tax profile align with the potential advantages and tradeoffs of an Installment Sales Trust.

Our Process For Evaluating an Installment Sales Trust

Choosing whether to use an Installment Sales Trust is a significant decision, and a clear, methodical process can make that choice more manageable. We begin by gaining a detailed understanding of the property being sold, the anticipated sales price, and any existing financing that may affect structuring options. We also discuss the client’s broader estate and financial goals so that the potential use of an Installment Sales Trust is considered in context rather than in isolation.

Once we understand the client’s objectives, we coordinate with the client’s tax and financial advisors to model how different approaches may affect cash flow and tax exposure over time. This often includes comparing an immediate sale, a traditional installment sale, a 1031 exchange, and an Installment Sales Trust side by side. For clients in Virginia and Washington, D.C., we take into account state income tax rules and the possible timing of other income events to see how various strategies may interact in a given year.

As a next step, we outline a proposed Installment Sales Trust structure that addresses payment terms, anticipated investment approach within the trust, and how the installment note will coordinate with existing or planned estate planning documents. We then review this proposed structure with the client, answering questions and refining the approach until there is a clear written plan. Because the laws governing installment sales and trusts are complex, we place a strong emphasis on documentation, communication among advisors, and ensuring that everyone involved understands their role before the property is brought to closing.

Important Legal Disclosure

This content is provided for informational purposes only and does not constitute legal or tax advice. Installment Sales Trusts involve complex legal and tax considerations and are not suitable for all transactions. Tax treatment depends on individual circumstances, proper structuring, and ongoing compliance. Consultation with qualified legal, tax, and financial advisors is required.

Any decision to implement an Installment Sales Trust should follow a careful review of current federal and state tax law, the economics of the proposed sale, and the client’s broader estate and financial plan. Laws in Virginia, Washington, D.C., and at the federal level can change, and those changes may affect the benefits and risks of a particular structure. By engaging a coordinated team of advisors, clients can better understand the potential consequences of different strategies and make informed choices that reflect their priorities and tolerance for complexity.

Connect with an experienced installment sales trust lawyer as soon as possible. Dial (888) 885-9001 for a consultation.

Frequently Asked Questions

How Long Does It Take to Set Up an Installment Sales Trust?

The time required to set up an Installment Sales Trust depends on the complexity of the transaction and how quickly information can be gathered from the buyer and other professionals. In many cases, work begins several weeks or months before a projected closing date so that the trust documents, installment note, and sale agreement can be aligned. When a transaction is on a shorter timeline, close coordination among the legal team, tax advisors, and the title company becomes especially important.

Can an Existing Purchase Agreement Be Adapted to Use an Installment Sales Trust?

If a purchase agreement is already in place, it may still be possible to incorporate an Installment Sales Trust, but the feasibility depends on the specific terms of the contract and the parties involved. The agreement and closing instructions must allow for the trust to receive proceeds and issue the installment note in a way that is consistent with federal installment sale rules. A review of the existing documents is needed to determine whether amendments are practical and whether all parties are willing to proceed with a revised structure. Connect with an experienced IST lawyer to learn what is best for your situation.

What Risks Should I Consider Before Using an Installment Sales Trust?

As with any planning strategy, an Installment Sales Trust carries potential risks that should be evaluated in advance. These can include investment risk within the trust, the possibility of future tax law changes affecting how installment sales are treated, and the administrative responsibilities of maintaining the trust over time. It is also important to consider personal factors, such as future cash flow needs, anticipated health expenses, and the financial circumstances of intended beneficiaries, so that the structure remains appropriate for many years.

How Are Installment Sales Trust Payments Reported for Tax Purposes?

Payments received from an Installment Sales Trust typically include both a return of principal and interest income, and each component is reported differently for tax purposes. The seller generally reports the taxable portion of gain over time under the installment sale rules, while interest is treated as ordinary income. Accurate annual reporting requires coordination between the trustee and the taxpayer’s accountant to ensure that information returns, such as Forms 1099, reflect the correct allocation of payments and that both federal and state filing obligations are met.

Is an Installment Sales Trust Appropriate for Small Transactions?

Because Installment Sales Trusts involve customized legal drafting, coordination among multiple advisors, and ongoing administration, they are typically evaluated for transactions of a certain size. For smaller sales, the cost and complexity may outweigh the potential benefits of deferring capital gains taxes over time. A preliminary discussion with legal and tax advisors can help determine whether the anticipated tax savings and planning advantages justify the additional work required.

Request an Installment Sales Trust Review

Deferring capital gains requires more than selecting a strategy—it demands careful legal analysis aligned with your long-term estate and business goals. With over two decades of experience, the attorneys at J S Burton, PLC provide the insight needed to navigate complex tax rules while protecting what you have built. Our boutique, holistic legal representation ensures your planning is integrated, not piecemeal, and tailored to your specific objectives. Clients value the personalized service and attention they receive throughout each phase of the process. We remain committed to protecting your legacy with thoughtful, client-focused care. Schedule a free, no obligation initial estate or business planning consultation to explore your options with confidence.

We provide legal analysis and structuring of Installment Sales Trusts in coordination with tax and financial advisors.

Contact our office to determine whether an IST™ is appropriate for your real estate transaction and estate planning objectives.