Structured installment sale vs 1031 exchange: which keeps more of a $1,500,000 rental sale (2026)

How each one works

1031 exchange. You sell, a qualified intermediary holds the cash, and you buy like-kind real estate. Identify it within 45 days and close within 180 (IRC 1031(a)(3)). Buy at least what you sold and replace the debt, and no gain is taxed now. Your old basis moves into the new property (IRC 1031(d)).

Structured installment sale. The buyer pays the full price at closing. Before closing, you agree to take your share as scheduled payments from an assignment company, funded by a life insurer. Because you never had the cash, you report the gain under the installment method of IRC 453 as each payment arrives.

So the first question is not which saves more tax. It is whether you want to own another property. If yes, start with the 1031. If not, a 1031 is off the table and the real choice is cash at once or a spread.

The numbers: one $1,500,000 rental, four ways

Assumptions (illustration only): married couple filing jointly in Texas (no state income tax), $40,000 of other ordinary income each year. They sell a rental for $1,500,000 net of costs. Adjusted basis is $500,000 after $300,000 of straight-line depreciation, so the gain is $1,000,000: $300,000 of unrecaptured Section 1250 gain (taxed at up to 25%) and $700,000 of long-term gain. No mortgage.

Tax figures are the federal income tax (including any alternative minimum tax) and 3.8% net investment income tax added by the sale, from the Big Sale Tax engine, standard deduction applied, with 2026 federal brackets (IRS Rev. Proc. 2025-32) held flat for every payment year. Later brackets are indexed for inflation, so later years are shown conservatively. Payout rate 6% is an illustration, not a quote.

Why the totals differ. The statutory rates are the same in every column.

The cash sale stacks $1,000,000 on one return, so the recapture slice climbs through the ordinary brackets toward the 25% cap ($58,288 of tax on it), the top of the long-term gain reaches the 20% band, and $30,020 of 3.8% NIIT applies above the $250,000 threshold.

The structured sale reports about $100,000 a year, so the long-term gain lands mostly in the 0% and 15% bands and the NIIT on the gain is $0.

Recapture: the slice taxed at up to 25%

The $300,000 of past depreciation is unrecaptured Section 1250 gain, taxed at your ordinary rate up to 25% (IRC 1(h)(6)). In an installment sale it is reported first, before any long-term gain (Treas. Reg. 1.453-12). That is why years 1 to 4 below carry the 25% slice, and why the tax drops in year 5.

Section 1245 recapture is different: it is taxed in the year of sale even in an installment sale (IRC 453(i)). This example has none. If you did a cost segregation study, the 1245 part is due at closing, so plan cash for it. See depreciation recapture.

Is the spread worth it after the interest? The fair test

The interest column is taxable income, so it is fair to ask whether the structured sale only looks better. The engine runs the honest race: the cash seller invests $1,286,987 at the same 6%, and both sides pay tax on their interest every year at their own stacked rate.

After 10 years the structured seller has $2,272,751 and the cash seller has $2,164,617. The difference, $108,135 ($64,828 in today's dollars), is the value of paying the gain tax later and in lower brackets. A higher return on the cash side would shrink it.

1031 + structured sale: the option most sellers are not shown

It is not one or the other. Say this couple wants some real estate but not all of it. They buy a $900,000 replacement and take the other $600,000 out. In a plain 1031 that $600,000 is boot, taxed now up to the gain (IRC 1031(b)): $118,108 on the 2026 return.

If the $600,000 is instead paid as a structured installment sale arranged before closing, the boot is reported on the installment method as it arrives (IRC 453(f)(6)). The tax on it falls to $33,959 over 10 years. The remaining $400,000 of gain stays deferred inside the new property, as in any 1031.

See also 1031 boot, 1031 vs installment sale and two kinds of installment sales.

Who each one fits

• 1031: you want more real estate, you can find it in 45 days, and you are fine staying a landlord.
• Structured installment sale: you are done owning property, want fixed income, and do not need the whole price at once.
• Both: you want a smaller property plus income, or you found a replacement that costs less than you sold for.
• Neither: you need the cash soon, or the gain is small enough that the spread saves little.

Limits and trade-offs

• Before closing only. Once sale money reaches you or your intermediary releases it, it is too late. See failed 1031 exchange.
• Fixed once set. You cannot speed up, sell or borrow against the payments; a pledge counts as a payment (IRC 453A(d)). See the pledge rule.
• Over $5,000,000. If installment obligations from the year's sales over $150,000 exceed $5,000,000 at year end, an interest charge applies to the deferred tax (IRC 453A). See 453A interest charge.
• Not for dealers or inventory. Dealer property cannot use the installment method (IRC 453(b)(2)).
• Insurer strength. The payments depend on the insurer behind the assignment company. The rate is fixed on funding day, and the agent's commission is built into it.
• At death. The remaining payments go to your beneficiaries; the gain in them is income in respect of a decedent, with no step-up (IRC 691).

Gray areas: competing positions

These points are argued both ways by careful practitioners. We show both sides; we do not pick one for you.

Constructive receipt and economic benefit

• Position A. Most practitioners and structured sale providers: if the buyer's obligation is assigned to a third party under terms signed before closing, and you have no right to the funds, you report under IRC 453 as payments arrive. Constructive receipt requires funds you could draw on (Treas. Reg. 1.451-2).
• Position B. Cautious commentators: no revenue ruling or regulation addresses the assignment-plus-insurer structure by name, so the IRS could argue you had the economic benefit of the cash at closing.

What both sides agree on: Set it up in the purchase agreement before closing; never hold, pledge or direct the funding asset.

How the boot gain is characterized in a 1031 + structured sale

• Position A. Our table, the conservative view: the recognized boot gain is treated as unrecaptured Section 1250 gain first, up to the depreciation taken, then long-term gain.
• Position B. Some practitioners allocate the recognized gain pro rata between the 25% slice and the long-term slice, which would lower the tax in the combined column.

What both sides agree on: The boot is taxable up to the gain, and the installment method can spread it if the structure is set before closing (IRC 453(f)(6)).

Monetized installment sales

• Position A. A structured installment sale with no loan to the seller is not a monetized installment sale. The 2023 proposed rule targets deals where the seller receives loan proceeds tied to the sale.
• Position B. Some advisers read the proposed rule broadly and want any third-party installment structure reviewed before closing. The rule is proposed, not final.

What both sides agree on: If a deal hands you a loan near closing, treat it as a red flag. See monetized installment sale.

Frequently asked questions

Sources

• IRC 1031, like-kind exchanges (Cornell LII)
• Treas. Reg. 1.1031(k)-1, deferred exchanges (eCFR)
• IRC 453, installment method, including 453(f)(6) and 453(i) (Cornell LII)
• Treas. Reg. 1.453-12, unrecaptured Section 1250 gain reported first (eCFR)
• IRC 453A, interest charge and pledge rule (Cornell LII)
• Treas. Reg. 1.451-2, constructive receipt (eCFR)
• IRC 1(h)(6), unrecaptured Section 1250 gain taxed at up to 25% (Cornell LII)
• IRC 1411, net investment income tax (Cornell LII)
• IRC 691, income in respect of a decedent (Cornell LII)
• Proposed rule REG-109348-22, monetized installment sales (Federal Register)
• IRS Publication 537, Installment Sales
• IRS Form 6252, Installment Sale Income (form and instructions)
• IRS Rev. Proc. 2025-32, 2026 inflation adjustments

Links checked October 26, 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.

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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.

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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.

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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.

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