Structured Installment Sales + DST 1031 Exchanges: How to Sell Appreciated Property Without the Tax Bomb
Why a lump-sum sale is so expensive
Consider a California retiree selling a long-held rental: $300K cost basis, $1.8M sale price, $1.5M capital gain. Conventional sale, all recognized in one year.
Tax stack on that $1.5M gain in 2026:
| Component | Rate | Tax owed |
|---|---|---|
| Federal LTCG (15% to $613K, 20% above) | 17-19% effective | ~$275K-$300K |
| Federal NIIT (3.8% above $250K MAGI) | 3.8% | ~$57K |
| CA state tax (ordinary rates, up to 13.3%) | ~13% effective | ~$195K-$200K |
| IRMAA spike (Tier 5, 2 years later) | $27,554 per couple/yr | ~$27K (1 year) |
| Total | ~$555K-$585K |
Combined: roughly $560K-$585K on a $1.5M gain. The retiree keeps about 61% of the appreciation. This is the "tax bomb" baseline every alternative measures itself against.
The Structured Installment Sale (Section 453)
IRC Section 453 is a 100-year-old provision allowing sellers of property to recognize capital gain as payments are received, rather than all at once at closing.
The classic seller-financed installment sale qualifies under 453 — but requires the seller to take on credit risk and asset-management duties for years. Most sellers don't want that.
The Structured Installment Sale (SIS) solves this. The buyer pays cash at closing. The cash goes to a third-party "assignment company" (typically an insurance-company-affiliated entity). The assignment company pays the seller on a customized fixed schedule — $300K/year for 5 years, $150K/year for 10 years, whatever the seller chooses. The schedule is guaranteed.
From the seller's tax perspective: gain is recognized as payments arrive, prorated against cost basis. From the buyer's perspective: it's a normal cash sale.
For a $1.5M gain spread over 5 years:
- Annual recognition: $300K (instead of $1.5M)
- Federal LTCG bracket: stays at 15% (no jump to 20%)
- NIIT: triggered but on a much smaller amount
- CA state: avoids the 13.3% top bracket
- IRMAA: stays at Tier 2-3 instead of Tier 5
Total 5-year tax + IRMAA: roughly $475K instead of $585K. Savings: ~$110K-$140K just from the bracket effects.
IRMAA interaction with recognition strategy
The IRMAA interaction is one of the most undersold benefits of SIS. A $1.5M gain recognized all at once puts a Medicare-age couple firmly in IRMAA Tier 5 for that year — roughly $27,554 of extra Medicare premium.
| Strategy | Years recognized | IRMAA tier triggered | Total IRMAA cost |
|---|---|---|---|
| Lump-sum sale | 1 | Tier 5 (~$27,554) | $27,554 (1 year) |
| SIS 5-year spread | 5 | Tier 3 (~$9,277/yr) | $46,385 (5 years) |
| SIS 10-year spread | 10 | Tier 1 (~$2,297/yr) | $22,970 (10 years) |
| DST + 1031 | 0 (deferred) | None | $0 |
Counterintuitively, the 10-year SIS has lower cumulative IRMAA than the 5-year SIS because each year stays in Tier 1 instead of Tier 3. For Medicare-age sellers, this can flip the optimal SIS schedule from "spread it as little as possible" to "spread it as much as possible."
The DST 1031 exchange — defer everything
The 1031 exchange (Section 1031) lets you defer all capital gain by reinvesting sale proceeds into another "like-kind" real estate property within strict timelines (45 days to identify, 180 days to close).
For real estate-to-real estate exchanges this works, but most retirees don't want to actively manage a new property.
The Delaware Statutory Trust (DST) solves this. A DST is a passive ownership structure holding institutional-grade commercial real estate (apartments, industrial, medical office, single-tenant net-lease, etc.). You exchange into a fractional ownership of the DST. The DST sponsor manages the property. You receive monthly distributions and depreciation pass-through. No active management on your part.
Result: defer the entire $1.5M capital gain. Your cost basis carries into the DST shares. You collect income from the DST. When you eventually die holding the DST, your heirs receive a full step-up in basis — the deferred gain disappears entirely.
DSTs aren't free. Sponsor fees typically run 1-3% of investment annually, less liquidity than direct ownership, exposure to commercial real estate market risk. But for retirees exiting hands-on landlording without triggering a tax bomb while maintaining real estate income, the DST is clean.
Net dollars kept — all four strategies side by side
Same $1.5M capital gain. Same CA-resident retiree on Medicare. Four strategies:
| Strategy | Total tax + IRMAA | Net kept | % of gain kept |
|---|---|---|---|
| Lump-sum sale | ~$585K | ~$915K | 61% |
| SIS 5-year | ~$485K | ~$1,015K | 68% |
| SIS 10-year | ~$340K | ~$1,160K | 77% |
| DST + 1031 (deferred) | $0 (deferred to death / sale) | ~$1,500K | 100% (if held to death) |
The DST strategy depends critically on actually holding until death. If the seller has to sell DST shares later (unforeseen liquidity need), the deferred gain comes due then. For retirees with a clear "hold to step-up" plan, DST is the most powerful tool. For retirees who may want flexibility, the 10-year SIS often wins.
When each strategy is the right fit
Hold to death (no sale)
- You don't need the liquidity
- Property generates acceptable income
- Heirs receive full step-up in basis at death
- Often the cleanest answer when applicable
Structured Installment Sale (Section 453)
- Gain is $500K+ — large enough that spreading matters
- Seller wants the cash spread as income (replacing earned income in retirement)
- Seller wants a guaranteed fixed-schedule payment without managing real estate
- Comfortable with a 5-10 year payment commitment from an insurance-company-backed assignment
DST 1031 Exchange
- Substantial gain AND seller wants continued real estate exposure for income
- Plans to hold until death for step-up basis
- Comfortable with commercial real estate market risk
- Wants to fully exit active landlording without reinvestment management
For California retirees with appreciated rental property, the most common right answer is "hold to death if you can, SIS if you can't, DST if you want continued real estate income without active management." All three dramatically beat the lump-sum default.
If you have appreciated property you're considering selling, fill out the form below with the basics (current value, cost basis, time horizon). I'll send back a written comparison of all four strategies for your specific numbers.
Related reading
- California retirement tax guide
- Where to put house sale proceeds
- IRMAA brackets 2026
- 1035 exchange rules
- Best MYGA rates — 2026
Want my independent take on whether this fits your situation?
I'm Hans Goldstein — independent licensed insurance producer (NPN 20602398), appointed with multiple A-rated carriers. I run side-by-side comparisons against CDs, MYGAs, Treasuries, and MMFs every week for retirees and pre-retirees. Tell me what you're considering and I'll send back a written comparison.
Hans Goldstein · 213-414-2808 · NPN 20602398, independent licensed insurance producer appointed with multiple A-rated carriers
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