SIS vs 1031 Exchange: Two Different Questions

Go deeper: 1031 exchange vs installment sale, compared point by point on Big Sale Tax.

The Question Determines the Answer

Most California real-estate sellers' first instinct is "1031 exchange." Their CPA mentions it, their realtor mentions it, their tax attorney mentions it. It's the textbook default for deferring capital gains tax on real-estate sales. And for one specific seller, it's exactly right.

The question every California seller should ask BEFORE choosing 1031 vs SIS:

Do I want to stay in the real-estate business, or do I want OUT of it?

That single question determines which structure fits.

1031 Like-Kind Exchange: When It Fits

The 1031 exchange (IRC §1031) lets you defer the entire capital gain by reinvesting the sale proceeds into another "like-kind" real-estate property within 180 days. The full tax is rolled forward into the new property's basis. Eventually, when you sell THAT property, you owe the deferred tax (unless you 1031 again).

1031 fits when you:

• Want to stay in real estate as an asset class for another 10-20+ years
• Have the energy + willingness to manage a different property
• Can identify a replacement within the 45-day window
• Accept the Prop 13 reset on the replacement property (often adds $20K-$80K/year in property tax)
• Are comfortable with the deferred tax becoming an heir problem at death (assuming you don't sell again)

Structured Installment Sale: When It Fits

The SIS (IRC §453) lets you sell the asset, exit real-estate entirely, and convert the proceeds into a scheduled monthly income stream for 5-40 years, owed by an assignment company and funded by a fixed annuity from a highly rated life insurer. The gain is recognized pro-rata as each payment is received, keeping each year's recognition under the 15% federal LTCG ceiling and the NIIT floor.

SIS fits when you:

• Want OUT of real estate (or business ownership) permanently
• Are retired or semi-retired with $50K-$200K in post-sale ordinary income
• Want scheduled monthly income (not market-dependent returns)
• Don't want to manage another property, another business, or another set of tenants
• Want the bracket-compression tax savings (typically 8-14 percentage points off the effective rate)

The Honest 1031 Reality Most Advisors Don't Spell Out

1031 isn't tax-FREE; it's tax-DEFERRED. Every time you 1031, you're rolling a larger and larger latent tax bill into the next property. Eventually one of two things happens:

1. You sell without 1031'ing again → the entire deferred tax comes due in ONE year on a now-much-larger gain
2. You die holding the property → IRC §1014 steps up the basis to FMV at death → heirs sell tax-free

Option (2) only works if you (a) hold until death, (b) don't ever need the liquidity, (c) Congress doesn't modify §1014 (proposed multiple times), and (d) you're truly fine never enjoying the proceeds during your lifetime.

"1031 into another property" is a great fit for sellers who genuinely want to keep being landlords. For sellers who are ready to exit, it’s the wrong tool. The SIS, CRT, or 1031+SIS combo is what fits.

You Don’t Have to Choose: 1031 + SIS Can Work Together

1031 and SIS are not mutually exclusive. If you want to partially exit real estate (downsize, free up some cash for retirement) but stay invested in a smaller property, you can do both in the same transaction.

The mechanic: any sale proceeds you don’t fully reinvest into the replacement property are called “boot”, and boot is taxable in the year of sale. You can run the boot through an SIS instead of taking it as a lump-sum gain. The like-kind portion stays 1031-deferred against the smaller replacement property; the cash difference gets §453 installment treatment and spreads across 5-40 years of annuity payments.

Example: $3M sale, you buy a $1.8M replacement → $1.2M of boot. Without SIS, that $1.2M hits all in Year 1. With SIS on the boot, it spreads pro-rata across the annuity term, keeping each year under the 15% LTCG ceiling. You stay in real estate at a smaller footprint AND keep the boot out of a one-year tax hit. Coordinate with your Qualified Intermediary up front; the SIS rider gets layered into the exchange agreement before closing.

The Management Burden Question

If you 1031 into a property of the same size, you’re back to managing it (or paying 8-10% of gross rents to a property manager and still overseeing them, signing leases, approving repairs, handling evictions, chasing late rent). That’s fine if you enjoy the business. If you don’t, or if you’re at the age where managing tenants from a distance is harder than it used to be, that’s a clear signal to look at SIS (or the 1031+SIS downsize combo, which lets you keep one smaller property without the work of two). Full breakdown of the management question →

Concrete Example: $2M California Rental, $400K Basis, $300K Depreciation Taken

Same property, three paths. Numbers are illustrative and round; your CPA runs the actual.

Year 1 outcome	Cash sale	1031 exchange	SIS (§453)
Capital-gains tax Year 1	~$510K	$0 deferred	~$25K (pro-rata)
Depreciation recapture (§1250)	~$75K Year 1 (25%)	$0 deferred	~$75K Year 1 (cannot spread)
Cash in pocket Day 1	~$1.41M (after-tax)	$0 (rolled into replacement)	Cash carve-out you choose
You’re still a landlord?	No	Yes (replacement property)	No
Prop 13 reset on replacement?	N/A	Yes, new property at current FMV	N/A
Income source for the next 20 years	Your investment of after-tax cash	Rent on replacement property	Assignment company, funded by a fixed annuity

Note the asymmetry on recapture: §1250 depreciation recapture is recognized in Year 1 of any SIS; §453 does not allow recapture to spread. On heavily-depreciated rentals, this is a meaningful tax bite that the 1031 path defers entirely. If your property has $200K+ of accumulated depreciation, the 1031 is mathematically better on the recapture portion, even though SIS still wins on the gain portion. Run both through the advanced calculator.

The §453A Interest Charge: When the SIS Premium Exceeds $5M

One technical wrinkle worth knowing: if your SIS structured premium (the dollars going into the carrier-funded annuity) exceeds $5,000,000 outstanding at year-end, §453A applies an annual interest charge on the deferred tax attributable to the excess. The charge is computed at roughly the federal underpayment rate (currently AFR + 3% ≈ 8%) on the deferred tax on the portion over $5M.

Three mitigation paths if your structured portion exceeds $5M:

1. Larger cash carve-out at closing: reduce the structured portion below $5M and take the difference in cash. The §453A doesn’t apply at all.
2. Tranche across multiple SIS contracts: split the sale into two or more structured agreements each under $5M (multi-carrier placement). Each tranche stays under the threshold.
3. 1031 the like-kind portion + SIS the boot: if downsizing fits your goals, the 1031 leg keeps the bulk of the deferred gain off the §453A clock entirely; only the SIS boot portion (the cash difference) is subject to the test, and that’s usually well under $5M.

The advanced calculator computes the §453A interest charge automatically and shows whether the SIS still wins after the charge.

Structured installment sale vs 1031: common questions

Can I use a structured installment sale instead of a 1031 exchange?

Yes, if you are done owning property or a business. A 1031 exchange defers gain only if you buy like-kind replacement real estate within 45 days to identify and 180 days to close. A structured installment sale under IRC Section 453 lets you sell for cash and report the gain as payments are received, with no replacement purchase. Compare both on the calculator.

Can a business sale use a 1031 exchange?

Generally no. Since 2018, Section 1031 applies only to real property, so goodwill, equipment and stock in a business sale do not qualify. A structured installment sale can apply to the gain on a business sale, subject to the Section 453 rules and your tax advisor's review.

Can I combine a 1031 exchange and a structured installment sale?

Potentially. Some sellers exchange part of the proceeds into replacement property and take the rest as a structured installment sale. How the combination works.

Side-by-Side: Quick Reference

Question	1031 Exchange	SIS (§453)
Tax outcome	Deferred	Spread + bracket-compressed (8-14 pts permanently saved)
Stay in real estate?	Yes (required)	No (you exit)
Management burden	New tenants, new property, new headaches	Zero: the assignment company pays you on schedule
Income	Rent (vacancy + repair risk)	Scheduled monthly payments from the assignment company
Prop 13 reset	Yes on replacement property	N/A (no replacement)
Best for	Sellers staying in real estate	Sellers exiting real estate