You've owned the building for 15, 20, 25 years. Rents are up, the loan is small, and the offer on the table is real money — until you run the tax math. Here's what actually happens the year you sell, and the one legal move that can keep six figures of it out of the IRS's hands.
Say you bought a 24-unit building in Long Beach in 2004 for $1.4M and it's under contract today for $4.6M. Your broker's flyer talks about cap rate and NOI. It doesn't talk about what's waiting in April.
Your gain isn't $3.2M on paper — it's higher, because two decades of depreciation lowered your basis. If you've claimed roughly $900,000 in depreciation over the hold, your adjusted basis drops to about $500,000, pushing your taxable gain to $4.1M.
Of that, the depreciation itself — $900,000 — is taxed as unrecaptured §1250 gain, capped at a federal 25% rate, recognized in the year of sale. That's $225,000 gone before you even get to the rest of the gain.
The remaining $3.2M of appreciation gain, taken all in one year, stacks you into the top federal long-term capital gains bracket (20%), the 3.8% Net Investment Income Tax, and California's up to 13.3% ordinary income rate (California doesn't recognize a reduced capital gains rate). Combined marginal exposure on that slice can run 35-37%.
Add it up on this example and total tax can land north of $1.3M — before escrow fees, broker commission, or the loan payoff. All in one April.
Most multifamily sellers default to a 1031 exchange because it's the tool their broker knows. But a 1031 has a catch few sellers appreciate until they're in it: you have 45 days to identify a replacement property and 180 days to close, into whatever inventory happens to be available, usually at compressed cap rates because every other exchange buyer is competing for the same properties. You also stay a landlord — new roof, new tenants, new headaches, just moved down the freeway.
A Structured Installment Sale under IRC §453 takes a different approach. Instead of deferring tax by buying another building, you spread the recognition of your gain across a schedule of years you choose — 5, 10, 20 — so more of it lands in the 0% or 15% long-term capital gains brackets instead of getting steamrolled by the top bracket, the NIIT, and California's rate all in the same twelve months.
Critically, the buyer still pays 100% cash at closing. This is not seller financing and you are not carrying a note on the building. The buyer's obligation to pay you is assigned, through a licensed assignment company, to fund an annuity contract issued by an A-rated insurance carrier. You become the payee of a stream of payments — not the owner of a promissory note, not a landlord, not exposed to buyer default risk the way seller-carry sellers are.
We'll be straight with you: the $900,000 of depreciation recapture in the example above does not get spread the same way appreciation gain does under current guidance — it's generally recognized in the year of sale regardless of installment treatment. The §453 structure's real leverage is on the appreciation gain, which for a long-held apartment building is usually the larger slice of the pie.
On the $3.2M appreciation slice, spreading recognition over, say, 10 years instead of taking it all in one year can mean the difference between paying blended rates near 35% and paying rates closer to 15-20% on a meaningful portion of it — because you're filling up the lower brackets each year instead of overflowing straight into the top one. On a gain this size that can mean mid-six-figures kept that would otherwise go to tax.
This has to be papered before you sign the purchase and sale agreement — not after escrow opens. If the PSA is already signed with fixed terms, the installment structure generally can't be layered in retroactively.
Here's the part sellers underrate: because you're not paying the full tax bill upfront, the entire pre-tax amount — not just your after-tax proceeds — compounds inside the annuity structure for the life of the schedule. On a $4.1M gain, the difference between compounding $4.1M pre-tax versus roughly $2.8M after immediate tax is not small over 10-20 years.
You also aren't forced back into real estate on someone else's clock. Some clients use the freed-up structure to diversify into other assets entirely, take a fixed income stream in retirement, or simply stop being a landlord — a decision that has nothing to do with tax and everything to do with quality of life.
Generally no — depreciation recapture under §1250 is recognized in the year of sale regardless of installment method. The §453 spreading benefit applies to the appreciation gain above your recaptured basis, which is usually the larger portion of a long-held multifamily sale.
No. In a Structured Installment Sale the buyer pays 100% cash at closing through escrow like any normal sale. You are never carrying a note or exposed to buyer default. The payment obligation is assigned to a licensed third party that funds an annuity from an A-rated carrier.
Yes, and for some sellers who genuinely want to keep buying real estate, a 1031 is the right call. §453 is usually the better fit when you want out of active real estate management, don't want the 45/180-day exchange clock, or don't like what's available to trade into right now.
Before the purchase and sale agreement is signed and before escrow opens. Once the PSA locks in a straight cash close, the installment structure generally can't be added after the fact.
No. Some sellers who are relocating out of state anyway can layer additional state-tax benefits on top, but the §453 structure works for California residents staying in California — the core benefit is bracket management on the federal and state timing of the gain.
Plug in your sale price, basis, and state — the calculator runs your exact 2026 federal + California tax and shows what a Structured Installment Sale keeps in your pocket.
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Or talk it through: 213-340-2018 · Hans Goldstein · NPN 20602398. Educational only — not tax, legal, or accounting advice.
