California has no estate tax on paper. But Proposition 19 quietly rewrote the parent-to-child inheritance rules — and forced a generation of heirs into selling appreciated property they can't afford to keep. If you've inherited or expect to inherit real estate in California, the §453 Structured Installment Sale is the one deferral tool your CPA probably hasn't mentioned.
California doesn't collect a state-level estate tax or inheritance tax. That's the official line, and it's technically true. But Proposition 19, passed by voters in November 2020 and effective February 16, 2021, created something that functions almost identically to a death tax — just delivered through the property-tax system instead of the estate-tax system.
Before Prop 19, California's Prop 58 (from 1986) and Prop 193 (from 1996) let parents transfer the Prop 13 property-tax base — the low, locked-in assessed value that comes with long-held real estate — to their children on any property, primary residence, rental, or vacation home. The kids inherited the home and inherited the low tax bill. That was California's version of the stepped-up basis. It's why some grandkids still pay $2,000/year in property tax on homes now worth $3 million.
Prop 19 ended that. Now, unless the child moves into the property as their primary residence within one year, and the market value is within roughly $1 million of the parent's original assessed value, the property is reassessed to current market value. Every rental. Every vacation home. Every primary residence the kid doesn't personally move into. Reassessed.
Say your parents bought a Los Angeles home in 1975 for $85,000. Under Prop 13, their assessed value has crept up at 2% a year, so by 2026 it's assessed around $210,000 and their annual property tax is roughly $2,600.
Fair market value today: $2.1 million.
Your parents pass. You inherit. You don't want to move in — you already have a home, or a job in another city, or you already own real estate and just want the money. So the county reassesses the property to $2.1M. Your new annual property tax bill: roughly $26,000 a year, plus HOA, insurance, upkeep.
That's a 10x increase, overnight, on a property you didn't buy and never lived in. And Prop 19 doesn't care whether you can afford it.
For most non-moving-in heirs, the reassessed carrying cost forces a sale within 12–24 months. You didn't ask to be in the property market. You didn't ask to sell. But the numbers make holding untenable, and the exit is: sell, pay capital gains tax, absorb the loss, move on.
Selling doesn't rescue you. It just moves the pain from property tax to income tax.
Your parents' original basis in the home was $85,000. They lived in it, so no depreciation. You inherit at a stepped-up federal basis of $2.1M (that's the one break federal tax law still gives you — an important one). You sell for $2.15M six months later.
Federal gain: only about $50,000 (thanks to the step-up). Federal tax on that: manageable, maybe $12–15K depending on your income.
But California does not respect the federal step-up for state tax purposes on certain property structures — and this trips up a huge percentage of inherited-property sellers. If the property was held in a partnership, LLC, or certain trust structures, California's rules can force a much lower basis at death. And more importantly: rental properties held in the parent's name individually with depreciation history can trigger meaningful state capital gains tax and depreciation recapture even after federal step-up.
The bigger issue: many heirs inherit not just the home but also the rental the parents owned across town, or the family vacation cabin, or the strip mall Dad built in 1988. On investment property, the depreciation recapture alone can generate a six-figure tax bill — even after step-up. And unlike a primary residence, there's no §121 exclusion to soften the blow.
Add California's top marginal rates (up to 13.3%) plus 3.8% federal Net Investment Income Tax on the gain, and you can watch $200K–$600K of your inheritance disappear into the tax bill in a single closing.
A Structured Installment Sale (SIS) is a specific implementation of an installment sale under IRC §453. Instead of taking all the cash at closing and paying all the tax that year, the seller assigns a chosen portion of the proceeds to a highly-rated life insurance carrier — Independent Life, MetLife's Metropolitan Tower Life, or Prudential are the primary issuers. The carrier holds the assigned amount and pays the seller in periodic installments at a guaranteed interest rate, on a schedule the seller designs.
The seller controls the schedule. 5 years, 10 years, 20 years, level payments, balloon at the end, front-loaded to specific tax years — all customizable. And critically, the tax is paid as payments are received, not all at closing.
Two other tools get pitched constantly, and they're both a bad fit for the typical Prop-19 heir.
A 1031 defers gain — but only if you reinvest the entire sale price into another like-kind property within 180 days, identifying candidates within 45 days. If you're selling because you don't want to be a landlord, don't want to manage tenants, or don't want more California property, a 1031 solves the tax problem by keeping you in the exact situation you're trying to exit. It's not deferral; it's rotation.
The Deferred Sales Trust (DST) looks superficially similar to a §453 SIS — you sell, proceeds go to a trust, the trust pays you over time. The mechanism is different, though. A DST typically uses a private "installment note" from the trust to the seller, with the trust holding the cash and often making a loan back to the seller. In IRS Chief Counsel Memorandum 202353018 (December 2023), the Service flagged DSTs as a listed transaction under review, signaling audit exposure for participants. Several DST providers have been sued or shut down since.
A §453 SIS avoids all of that. The buyer's proceeds go directly to a licensed insurance carrier that issues a periodic-payment contract to the seller. No trust. No loan-back. No IRS scrutiny.
Inherited property: single-family rental in Long Beach. Purchased by parents in 1982 for $120,000. Depreciation taken over 40 years: about $80,000, leaving adjusted basis at $40,000. Fair market value at parents' passing: $1,800,000. Sale price to unrelated buyer: $1,850,000.
Because it's a rental (not a primary residence to the heir), the reassessed property tax on holding it would be ~$22,000/year. The heir doesn't want to be a landlord. Decision: sell.
Federal step-up brings basis to $1,800,000 at date of death, so federal gain on sale is only $50,000. Manageable. But California doesn't fully match on all rental structures, and the depreciation history from the parents' ownership creates recapture exposure. Combined federal + California tax bill on a lump-sum closing: ~$140,000 (higher if the entity structure limits step-up further).
| Scenario | Cash at closing | Tax in year 1 | Payments over 10 yrs | Net position after 10 yrs |
|---|---|---|---|---|
| Lump sum, no SIS | $1,850,000 | –$140,000 | — | $1,710,000 |
| $1M SIS carve-out, 10-year term at 4.5% | $850,000 | –$65,000 | ~$127,000/yr from SIS | ~$1,930,000 |
| 100% SIS, 15-year level payments | $0 | –$0 in year 1 | ~$174,000/yr | ~$2,050,000 total received |
The carve-out version puts $850K in the seller's pocket immediately (paying off any mortgages, giving them liquidity, letting them reinvest what they want), takes tax pressure off the year of sale, and produces a guaranteed six-figure annual income stream from the carrier for a decade. Net position after 10 years is roughly $220,000 better than the lump-sum route — even before considering the year-of-sale bracket relief.
Two reasons. First, §453 Structured Installment Sales aren't a mainstream product. The two or three life carriers who issue them work through specialized deferral firms, not CPA firms. Most tax preparers know installment sales in the abstract (seller-financed notes) but have never worked with a carrier-backed structure and don't have a contact.
Second, it has to be set up before closing. Once escrow releases the buyer's proceeds to the seller, the constructive-receipt doctrine kicks in and §453 treatment is off the table. The paperwork has to be in place before the sale documents are signed. Most CPAs get the call from a client asking about deferral options after the sale has already closed.
If you're expecting to inherit or you already have and you're within 12 months of a likely sale, the §453 SIS analysis needs to happen before you sign a listing agreement. Once escrow opens, the clock is loud but the structure is still viable — as long as the paperwork is drafted and the assignment to the carrier is executed before closing.
If you're staring at a Prop 19-reassessed property tax bill you can't carry, or you're planning ahead of a parent's estate that includes California real estate, the questions to work through are:
Goldstein & Co. models §453 Structured Installment Sales for California heirs and property owners facing Prop-19-triggered sales. The consultation is free, and the model shows real numbers — federal, California, depreciation recapture, projected installments — before you commit to a structure.
Request the model Read the §453 vs DST breakdown