1031 Now, Structured Installment Sale on the Exit: The Math

Short answerA 1031 exchange postpones the gain; it does not erase it. The old gain rides into each replacement, and the whole stack comes due when you finally sell for cash. A structured installment sale on that last sale spreads it. On the $3,600,000 exit below, tax fell from $744,972 to $389,890 over 20 years. Holding until death can beat both.

How the deferred gain stacks

In a 1031, the basis of the property you give up carries into the one you get (IRC 1031(d)). The gain you did not pay waits inside the new property. Then the new property is depreciated, which lowers the basis again and adds to the 25% bucket of unrecaptured Section 1250 gain (IRC 1(h)(6)).

Exchange a few times over 20 years and the deferred gain can be larger than the property's original price. Each exchange is recorded on Form 8824, which carries the deferred gain forward. The exit is where that number finally meets a tax return.

Worked example: the exit, eight years after the exchange

Assumptions (illustration only): the couple from the 1031 vs structured sale example exchanged in 2026 into a $3,000,000 property with a $900,000 carryover basis. By 2034 more depreciation has brought the adjusted basis to $650,000. They sell for $3,600,000, a $2,950,000 gain. Of that, $850,000 is unrecaptured Section 1250 gain.

They file jointly in Texas with $90,000 of other ordinary income. On the 20-year schedule, $180,000 of principal arrives each year, and about 82% of it ($147,500) is gain. The 25% gain is reported first. The interest element is left out. No mortgage, selling costs ignored.

How the exchanged property is finally sold	Tax on the gain	When it is paid
Cash sale, one year	$744,972	One return
Structured installment sale, 10 years	$505,029 total	$68,558 a year for two years, $65,408 in year three, then $43,215
Structured installment sale, 20 years	$389,890 total	$28,150 a year for five years, $25,700 in year six, then $15,960
Hold until death	$0 income tax on the gain to the heirs under current law	Never, because of the step-up (IRC 1014); estate tax is separate

Tax figures are the added federal income tax (including alternative minimum tax) and 3.8% net investment income tax on the gain, from the Big Sale Tax engine, with 2026 federal law and brackets held flat for every year (IRS Rev. Proc. 2025-32). Future brackets are indexed for inflation, so later years are shown conservatively. The 2034 sale is run on 2026 law for comparison.

The spread works because $147,500 of gain a year stays under the $250,000 surtax threshold. The cash exit pushes $2,950,000 through the top rate and adds $106,020 of surtax. The 10-year schedule lands in between because $295,000 a year crosses the surtax line.

Why the exit is the natural place for a structured sale

The 1031 chain has done its job: it let your money grow without paying tax along the way. The exit usually comes when you want out of management, often in your late 60s or 70s. There is no replacement deadline at the exit, because you are not buying anything. The only date that matters is closing.

The structured installment sale has to be in the purchase agreement for that final sale. The buyer still pays cash and the closing looks normal. If you will want some cash, take part at closing and schedule the rest.

The heirs question: step-up vs a structured exit

Under current law, property held until death gets a basis equal to its value at death (IRC 1014), so the stacked gain is never taxed as income. A structured payment stream does not get that step-up. Payments left at death go to your beneficiaries, and the gain in them is still taxed as it arrives, as income in respect of a decedent (IRC 691(a)(4)).

	Hold until death	Structured exit	Cash exit
You stay a landlord	Yes, for life	No	No
Tax on the stacked gain	Erased by the step-up	Spread over the schedule	All at once
Payments left at death	Not applicable	Go to your beneficiaries, still taxed as they arrive (IRC 691)	Not applicable
Liquidity	Sell or borrow at any time	None beyond the schedule	Full

So the honest comparison is not structured sale vs cash. It is structured sale vs holding. If you are healthy, tired of management and want income, the structured exit often wins. If you would keep the property anyway, holding for the step-up can be the better tax result. See step-up at death.

The other order: a structured sale on the boot now

You do not have to wait for the exit. If you want some cash out of the exchange today, that cash is boot and is taxed now. Taking it as a structured installment sale set up before closing spreads it instead. The numbers are on 1031 exchange vs structured installment sale and the rules on the 1031 boot analysis.

Before you sell the exchanged property

Pull every Form 8824 and the depreciation schedule, so the gain and the 25% bucket are exact.
Pick a schedule length against your age and other income, not the longest one offered.
Keep the face amount in view. Notes over $5,000,000 at year end can owe the Section 453A interest charge; this example stays under it.
If you may move states, check the source rules before you choose a schedule. California taxes installment gain from California real property even after you leave (FTB Publication 1031).
Set it up weeks before closing, not days.

The 1031 and installment sale series

Frequently asked questions

What happens to deferred 1031 gain when I finally sell?

It is taxed in the year of a cash sale, together with any gain on the replacement property. The 25% unrecaptured Section 1250 gain from all the depreciation taken along the chain comes due as well.

Can I sell my 1031 replacement property on a structured installment sale?

Yes. The final sale is an ordinary sale, so it can use the installment method like any other. The structured installment sale must be written into the purchase agreement before that closing.

How long do I have to hold a 1031 replacement property before selling?

The code sets no fixed period, but the property must be held for investment or business use. Two years is a common benchmark, because the related-party rule in IRC 1031(f) and the IRS safe harbor for vacation homes use it.

Is it better to hold until death than to sell?

For income tax, often yes, because the step-up under IRC 1014 erases the stacked gain. But you keep the property, its management and its risk for life, and estate tax is separate. A structured exit trades the step-up for income and an exit now.

What happens to structured payments if I die?

The remaining payments go to your beneficiaries on the same schedule. The gain in them does not get a step-up and is taxed to the beneficiaries as it arrives, as income in respect of a decedent (IRC 691(a)(4)).

Does the 3.8% surtax apply to the exit?

To net investment income above $250,000 of modified adjusted gross income for joint filers (IRC 1411, not indexed). Spreading the gain is how the 20-year example avoids it.

Sources

Checked October 23, 2026.

Hans Goldstein is an Enrolled Agent, admitted to practice before the Internal Revenue Service. Not affiliated with or endorsed by the IRS. General education, not tax or legal advice for your situation.

Insurance products offered through Goldstein & Co. LLC dba Goldstein Insurance Services, CA license 4273294. If you implement a structured installment sale through that business, Hans is paid a commission by the insurer; it is built into the payout rate. See the disclosures.

Also free: the book Same Sale, Different Tax, the same $1,000,000 gain taxed ten ways. Want it run on your sale? Book a free scope call to see whether the Big Sale Tax Analysis is worth it.

Who you will talk to

Hans Goldstein · Sacramento, California
Hans Goldstein: Tax & Exit Planning, an independent practice. Enrolled Agent, admitted to practice before the Internal Revenue Service. CA Insurance License #4273294, NPN 20602398.

What happens first: You fill in the short form for a free scope call, about 5 minutes. Hans reviews every one personally and replies within 1 business day. If it is a fit, you get a link to book the call.
The scope call: Fifteen minutes, free: price, timeline, what you are selling and what the money is for. Scope means you hear whether the analysis is worth it for your sale.
What you get: A written side-by-side comparison of your cash-sale baseline against every path that fits, year-by-year numbers, a written recommendation, and a review meeting with you and, if you like, your CPA and attorney.
What it costs: The scope call is free. The Big Sale Tax Analysis is $5,000 per household per transaction, only if you decide it is worth it. No retainer, no hourly billing, no obligation to use any strategy.
How Hans is paid: The $5,000 fee pays for analysis only and is not reduced or credited if you buy anything. You are never required to buy anything. No referral fees are paid to or received from brokers, CPAs or attorneys. Hans is also a licensed insurance producer with a separately owned insurance business. That business is not part of this engagement, and the analysis does not recommend insurance products. If you later choose an installment sale funded through an insurance company, that company pays Hans a commission through his separate insurance business. He may be compensated by that business if you use an insurance-funded installment sale. Hans is an Enrolled Agent (EA), admitted to practice before the Internal Revenue Service. He is not a CPA, attorney or registered investment adviser; the analysis models tax effects and does not recommend specific securities. Read the disclosures.

Book a free scope call or call 213-340-2018. Hans answers or calls back the same business day.

1031 now, structured installment sale on the exit