If you live in California and are preparing to sell a highly appreciated asset, you already know how significant the tax exposure can be. Between federal capital gains taxes and California state taxes, many sellers are shocked by how much of the sale can go toward taxes.
One of the most common questions we hear at Engineered Capital Gains Solutions is:
"Can a Deferred Sales Trust actually be used in California?"
The answer is yes.
A Deferred Sales Trust is structured using the installment sale provisions under Section 453 of the tax code, and California recognizes installment sale treatment like the federal IRS does. Contrary to what some competitors may suggest, a Deferred Sales Trust is not considered a listed transaction and is not part of the IRS "Dirty Dozen" tax list.
That said, like many tax strategies, problems can arise when structures are created improperly or pushed aggressively without the right legal and trustee oversight. There are other Section 453 strategies in the marketplace that have been abused or structured incorrectly over the years, which sometimes creates confusion for sellers researching these concepts online.
That is why working with an experienced trustee and legal team matters.
At ECGS, we focus heavily on making sure transactions are structured properly from the beginning. Whether someone is looking at a traditional sale, a 1031 exchange rescue situation, or exploring alternatives to remaining fully concentrated in real estate, proper planning before closing is critical.
California transactions can also involve additional items that need to be handled carefully, including transfer taxes, escrow coordination, and other state-specific considerations. Like some other states around the country, if these items are not addressed correctly upfront, they can create issues later down the road.
Most importantly, a Deferred Sales Trust is not a one-size-fits-all solution. In some situations, a 1031 exchange may still make more sense. In others, a Deferred Sales Trust may provide more flexibility depending on the seller's goals, liquidity needs, diversification concerns, or long-term planning objectives.
The key is making sure you understand both the benefits and limitations before making a decision.
If you are preparing to sell real estate, a business, stock, crypto, or another highly appreciated asset in California, our team at ECGS would be happy to help you evaluate whether a Deferred Sales Trust may be appropriate for your situation.
Reach out to our team below to schedule a conversation before your sale closes.
The information in this article is for educational purposes only and is not legal, tax, or investment advice. Every situation is unique and you should consult with qualified professionals before making any decisions.