Proceed with caution
Monetized Installment Sales (Proceed With Caution)
A monetized installment sale is marketed to sellers of appreciated property as a way to receive nearly all the cash now while deferring the capital gains tax for decades. The IRS has said the arrangement does not work as promoted, and in 2025 it proposed regulations to identify it as a listed transaction. On a $4 million gain, a disallowed deferral can mean the full $952,000 of tax in the year of sale, plus penalties and interest.
Reviewed by Ebot Mbi, CPA, EA · Last reviewed October 9, 2026
Who it fits
- Sellers who have been offered this arrangement and want an independent review
- Owners of appreciated real estate or businesses comparing deferral options
- Taxpayers who already entered into one and need to understand disclosure and exposure
- Advisors coordinating a sale who need a compliant alternative
Who it's not for
- Anyone looking for a way to receive the full sale price now without recognizing the gain
- Sellers unwilling to file the disclosure a listed transaction would require
- Taxpayers who cannot absorb the full tax, penalties, and interest if the deferral is disallowed
How it works
In general terms, the seller sells property to an intermediary in exchange for a long-term installment note. The intermediary resells the property to the real buyer for cash. The seller then receives a loan, usually close to the full sale price, from a lender connected to the arrangement. The note's payments and the loan's payments are structured to offset. The seller reports the sale on the installment method and treats the loan proceeds as non-taxable.
The IRS's position, set out in Chief Counsel Advice 202319018 and in its 2025 proposed regulations, is that the seller has in substance received the buyer's cash. The intermediary is treated as an agent or a conduit, the steps are collapsed, and the loan proceeds are treated as payment on the installment note. The result is full gain recognition in the year of sale.
Listed-transaction status matters on its own. Participants must disclose the transaction on Form 8886. Failing to disclose carries separate penalties, and any understatement tied to the transaction faces a 20% penalty, rising to 30% if it was not disclosed. The statute of limitations can stay open for undisclosed listed transactions.
There are compliant ways to defer or reduce gain. A true installment sale lets you pay tax as you actually collect, with the buyer's credit risk on you. A §1031 exchange, including into a Delaware statutory trust interest for investors who want passive ownership, defers gain on real property held for investment or business use. A qualified opportunity zone fund investment can defer and reduce gain under rules that depend on the investment date.
Illustrative example
Illustrative: an investor sells land held for investment for $5,000,000 with a $1,000,000 basis. She is in the top bracket and pays 20% plus the 3.8% investment tax. Compare the exposure if a monetized installment sale is disallowed with a true installment sale that has $1,000,000 down.
- Gain: $5,000,000 - $1,000,000 = $4,000,000
- Tax if the full gain is recognized in the year of sale: $4,000,000 x 23.8% = $952,000
- Possible undisclosed reportable transaction penalty: $952,000 x 30% = $285,600
- Exposure before interest and fees: $952,000 + $285,600 = $1,237,600
- True installment sale: gross profit ratio = $4,000,000 / $5,000,000 = 80%
- Year 1 gain on $1,000,000 down: $1,000,000 x 80% = $800,000; tax = $800,000 x 23.8% = $190,400
- Tax deferred to the years payments are received: $952,000 - $190,400 = $761,600
In this illustration, a true installment sale defers $761,600 of tax under settled rules, while a disallowed monetized sale could cost $1,237,600 plus interest.
The rules
| Rule | Citation |
|---|---|
| The installment method lets gain be reported as payments are received on a genuine deferred-payment sale. | IRC §453 |
| Pledging an installment obligation as security for a loan can cause the loan proceeds to be treated as payment. | IRC §453A(d) |
| The IRS concluded that a monetized installment sale arrangement does not qualify for installment reporting. | IRS Chief Counsel Advice 202319018 |
| Participants in listed transactions must disclose them, and related understatements carry a 20% penalty, or 30% if undisclosed. | IRC §6011, §6707A, and §6662A |
| Like-kind exchanges defer gain on real property held for investment or business use; DST interests can qualify. | IRC §1031; Rev. Rul. 2004-86 |
Watch-outs
- Promoter opinions do not protect you if the arrangement is disallowed. Penalty defenses based on a reliance opinion are limited for listed transactions.
- Once the proposed regulations are finalized, prior participation may also require disclosure. Review past years, not only new sales.
- A true installment sale puts real buyer credit risk on you, and installment notes over $5,000,000 in total can trigger an interest charge on the deferred tax.
- Depreciation recapture is taxed in the year of sale even under a true installment sale.
What we do
We review any arrangement you have been offered, quantify your exposure, and handle disclosure if you have already participated. We then model compliant alternatives, a true installment sale, a §1031 exchange, or an opportunity zone investment, and coordinate with your attorney and qualified intermediary.
Questions
Is every installment sale under scrutiny?
No. A genuine installment sale where the buyer pays you over time is a long-standing, accepted method. The concern is with arrangements that put the cash in your hands now through a related loan.
I already did one. What should I do?
Have the transaction reviewed now. Disclosure obligations and amended-return options depend on the facts and the status of the regulations.
What is the closest compliant alternative?
For investment real estate, a §1031 exchange is usually the closest. For other property, a true installment sale or an opportunity zone investment may fit.