Structured Installment Sales: The Straightforward Path to Deferring Taxes on Real Estate Sales

When I talk with Bay Area homeowners, especially those who’ve held property for decades, the same worry comes up again and again: “I’d like to sell, but if I do, I’ll get walloped with capital gains taxes.”

For many, a traditional 1031 exchange isn’t a good fit. They’re done being landlords and don’t want another property to manage. Deferred sales trusts get pitched a lot, but many clients are uneasy when they find out the IRS has never formally blessed them. Section 721 exchanges into REITs can work, but they come with their own costs and complexities.

There is another option—one that’s been in the tax code for decades, one that the IRS clearly recognizes, and one that gives you guaranteed income with a lot less cost and complexity than other strategies. It’s called a structured installment sale.

What a Structured Installment Sale Really Is

At its core, a structured installment sale is simply an IRS Section 453 installment sale with an extra layer of protection. Instead of selling your property and getting one large check, you and the buyer agree—in the purchase and sale agreement itself—that you’ll receive payments over time.

But here’s the key difference: rather than relying on the buyer’s promise to pay you for years to come, the buyer assigns that obligation to a third-party “assignment company.” That company takes the buyer’s lump-sum payment and uses it to purchase a specially designed annuity from a major insurance carrier. From then on, it’s the insurance company that sends you the scheduled payments.

So instead of trusting the buyer’s creditworthiness, you have a contract with a financially strong insurer making those payments. Your future is no longer tied to whether the buyer keeps their end of the bargain.

Why People Choose Structured Installment Sales

The biggest reason people use this strategy is tax deferral. If you sell in one lump sum, you’ll owe all of your federal capital gains tax, plus the 3.8% net investment income tax, and, in many states, a hefty state income tax—all in the year of the sale. But under Section 453, you only recognize and pay tax on the portion of the gain allocated to each year’s installment. That means you spread the tax bill out over time, possibly avoid the 3.8% net investment tax altogether, and keep more of your sale proceeds working for you in the meantime.

Another reason is stability. Because the payments are coming from an annuity, they’re insulated from market volatility, interest rate swings, and the ups and downs of the equity markets. For someone who’s counting on these payments to fund retirement or supplement other income, that kind of predictability is invaluable.

There’s also an estate planning angle. Spreading out income may help you stay in lower brackets, avoid phase-outs of deductions or credits, and create a more controlled financial picture for your later years.

A Real-World Structured Installment Sale Example

Let me give you a case study based on a hypothetical transaction. In one example I reviewed, a long-time Bay Area homeowner named Mary decided to sell the family home in Saratoga, and was fortunate to get $4.35 million for it. She owned it free and clear, having paid it off some 20 years ago. Her husband had died about that time, giving her a nice step up in basis, but the home had continued to appreciate thereafter. Her adjusted basis, after the step-up, cost of sale, and $250,000 in capital gains tax exclusion as a single homeowner, was about $2.35 million. That left her with a taxable gain of right around $2 million flat.

If she had taken the entire payment in one year, she would have owed over $660,000 in combined California and Federal capital gains and net investment income taxes. By structuring the sale into a $2,350,000 upfront payment (the non-taxable portion of the sale) and fifteen annual installments for the balance ($2,000,000), Mary reduced her first-year tax bill to zero (while still getting the $2.35M in cash upon sale). Over the following 15 years, she would end up getting yearly payments of $184,000, and would owe a tax on that annual income of about $15K between the IRS and State of California. Because of the installment structure and some capital loss carry forwards, she completely avoided the 3.8% net investment income tax.

That’s the power of spreading out recognition. Instead of being slammed in year one, Mary managed her brackets, smoothed her income, and preserved more of her net proceeds—all while locking in a steady income stream.

The Downsides You Need to Know

This all sounds great, but a structured installment sale is not a magic wand. There are trade-offs.

The first is inflexibility. Once you’ve set up the annuity, it’s locked in. You can’t call the insurer two years later and say you’d like bigger payments or a lump sum. If you think you’ll need liquidity later, the way to handle that is by building lump-sum distributions into the schedule up front.

Second, while it is possible to sell your future payment stream to a factoring company or investor if you face an emergency, you’ll take a discount. Just like lottery winners who sell their structured payments for cash today, you’ll get less than the full value. It can be done, but it’s not ideal.

Third, you’re dependent on the claims-paying ability of the insurer. The companies that offer these products are typically highly rated, with long track records in the structured settlement industry, but you are putting faith in their long-term solvency.

And finally, there’s no upside. Your payments are fixed. You’re not reinvesting in stocks, real estate, or growth vehicles. You’ve traded liquidity and growth potential for stability.

Are Structured Installment Sales “IRS Approved”?

This is an important distinction. Critics of deferred sales trusts often point out that the IRS has never explicitly blessed them. That’s true—the DST is a private tax strategy, not written directly into the code, and its promoters rely on opinion letters and private interpretations rather than a specific statute.

Structured installment sales, on the other hand, are directly grounded in Section 453 of the Internal Revenue Code. They’ve been in use for decades, most prominently in the structured settlement industry for personal injury cases, and they are a well-accepted, IRS-recognized method of deferring gain.

That doesn’t mean every structured sale is bulletproof—tax law is always subject to interpretation, and you must follow the rules carefully. But unlike DSTs, this is not a “gray area” strategy. It’s squarely within existing IRS code.

How Structured Sales Compare to Other Tax-Deferral Strategies

A lot of my clients want to know how this stacks up against the other big deferral tools.

Compared to a deferred sales trust, a structured installment sale is far less flexible, but also far less costly. A DST might cost $10,000–$20,000 to set up and one percent of assets annually in trustee fees. A structured installment sale generally costs only a fraction of that, with modest setup expenses and no annual fees once the annuity is placed. DSTs let you reinvest and potentially grow your principal; structured sales just give you steady payments.

Compared to a Section 721 exchange into a REIT, the structured sale again looks simpler. A 721 exchange lets you contribute your property into a REIT in exchange for operating partnership units, which later can be converted into REIT shares. That gives you exposure to institutional real estate and the potential for dividend growth, but it also ties you up in REIT structures that may be illiquid for years. The structured sale doesn’t give you growth potential, but it does give you certainty.

What Insurance Companies Provide Structured Installment Sales?

Only certain insurers participate in this market. They are typically the same companies that dominate the structured settlement business, issuing annuities to pay out personal injury settlements and other long-term obligations. These are major, U.S.-based life insurance companies with strong credit ratings from agencies like A.M. Best, Fitch, Moody’s, and Standard & Poor’s. Choosing a financially strong carrier is critical, because your entire income stream depends on their ability to meet their obligations.

Are There Ongoing Costs?

One of the appealing aspects of structured installment sales is the lack of ongoing costs. Once the annuity is purchased, you simply receive the payments as scheduled. You’ll pay income taxes on those payments as you receive them, but there are no trustee fees, management fees, or annual costs to keep the structure alive.

When a Structured Installment Sale Makes Sense

From my perspective, this tool makes the most sense for sellers who want predictability, stability, and simplicity. It’s a strong choice for someone who’s done being a landlord, doesn’t want the complexity of a DST, and doesn’t need liquidity for other ventures. It’s also attractive for retirees or near-retirees who want to supplement Social Security or other income with a reliable stream of cash.

It’s not the right solution if you want flexibility or upside. Once the terms are set, they’re set. And if your appetite is for growth, or you want to leave as much as possible for heirs, you may prefer another strategy.

My Final Thoughts

Structured installment sales aren’t glamorous. They don’t have the marketing sizzle of some of the other tax-deferral products out there. But they are elegant in their simplicity. They’re rooted directly in the tax code, they’ve been around for decades, and they’re backed by some of the strongest financial institutions in the world.

If you’re considering selling a highly appreciated property and you’re worried about the tax hit, this is an option that deserves a serious look. As with any strategy, the right move depends on your goals, your financial picture, and your appetite for complexity and risk. My role is to walk you through these options, side by side, and help you choose the one that supports the next chapter of your life with confidence.