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1031 Exchange Installment Sale: What You Need To Know

Are you looking for a way to defer your capital gains taxes? 1031 exchange installment sales is a strategy that can be deployed. This tax-deferring strategy is a great way to maximize your profits by allowing you to shift the payment of capital gains taxes from one investment property or business to another replacement property.

Knowing how 1031 exchanges work can aid you in saving on your taxes on commercial real estate sales as well as potentially benefit you lucratively when investing in real estate or running a business. Let’s dive into the details! 

installment sale vs. seller financing

What Is a 1031 Exchange? 

A 1031 exchange, also known as a like-kind exchange, is an IRS-approved way for taxpayers to defer their capital gains taxes on the sale of an asset by reinvesting those proceeds into a “like-kind” asset.

The main benefit of this approach is that it allows taxpayers to postpone the payment of their capital gain taxes until they sell their “like-kind” replacement. It gives them more time to reinvest their profits and grow their wealth without paying hefty taxes upfront. This can be up to double the value of the relinquished property as seen in the 1031 exchange 200% rule.

What Is an Installment Sale?

An installment sale is when an asset’s purchase price is paid over time rather than all at once. It works similarly to a loan in which the buyer makes payments over a fixed period and has interest added on top.

The seller still receives all of the money they are owed. However, instead of receiving it at once, they receive it in installments over several months or years.

This benefits buyers and sellers since it gives buyers more flexibility when making large purchases. While allowing sellers to spread their income across multiple tax years, which can help reduce their overall tax burden.

What Is an Installment Sale as it Relates to a 1031 Exchange?

A 1031 exchange installment sale is a real estate transaction structured as an exchange or sale in which you receive payments over time. Both the buyer and seller benefit from this arrangement. The seller can realize appreciation on their capital gains tax-deferred basis. The buyer has more flexibility with acquiring the property since they are not paying for it all at once.

It’s important to understand that a “1031 Exchange” is not synonymous with an “installment sale.” A 1031 exchange helps you defer your capital gains taxes altogether. While an installment sale means you’re receiving predetermined payments instead of just one lump sum, it will not enable you to avoid paying taxes completely.

installment sale rules

1031 Exchange Installment Sale: What Is an Installment Tax Straddle?

An installment tax straddle is a transaction that enables an individual or company to manage income, capital gains and losses, and the timing of payments. This can help avoid incurring significant taxation liabilities in a single fiscal year.

The transactions typically involve creating offsetting positions in one fiscal year. In contrast, similarly offsetting positions are planned for the following fiscal year. For example, make a large sale in this calendar year. You can enter into a position with existing assets to reduce your tax liability for the current period by matching some of the gains with an equal deferred loss.

Although these transactions sound complicated, they have the potential to save a substantial amount of taxes if properly structured and managed. Understanding what installment tax straddles are and how they work is important for any individual or business interested in minimizing their taxable liabilities.

Final Thoughts

Investing in real estate or running businesses can lead to hefty capital gains taxes if not handled carefully. However, with a 1031 exchange installment sale plan, you can defer those taxes while still receiving all the money you are owed upfront.

This strategy allows you to spread your taxable income over multiple years. This will significantly reduce your overall tax burden while giving you more flexibility when making large investments or launching businesses.

Understanding how a 1031 exchange installment sale works will give investors and entrepreneurs peace of mind. They will know that they are making informed financial decisions that best serve their long-term goals.

1031 exchange installment sale

How Point Acquisitions Can Help

Point Acquisitions is a team of experienced professionals specializing in 1031 exchange and commercial real estate services. With their expertise, they can help guide you through the complexities of a 1031 exchange or installment sale, helping you make the best decisions for your financial future.

From start to finish, Point Acquisitions will work with you every step of the way to ensure that your exchange or installment sale goes smoothly and quickly. We understand these decisions’ importance, so we are committed to providing a reliable and trustworthy service to all our clients.

About The Author

Jesse Shemesh

With a wealth of experience in nurturing diverse commercial real estate investment portfolios across multiple markets, I actively engage in the development and execution of deals spanning all asset classes. My expertise lies in collaborating with strategic partners, including corporate real estate professionals, fund managers, developers, and investors, to source, identify, and entitle opportunities. At Point Acquisitions, we take pride in our unique, proprietary platform that specializes in property acquisitions, generating a steady stream of organic deal flow that sets us apart from the competition. As a seasoned professional in the real estate industry, I am dedicated to creating lasting partnerships and delivering exceptional results for all stakeholders.


Please note that Point Acquisitions is not a tax expert or tax advisor. The information on our blogs and pages is for general informational purposes only and should not be relied upon as legal, tax, or accounting advice. Any information provided does not constitute professional advice or create an attorney-client or any other professional relationship. We recommend that you consult with your tax advisor or seek professional advice before making any decisions based on the information provided on our blogs and pages. Point Acquisitions is not responsible for any actions taken based on the information provided on our blogs and pages.

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