Monetized Installment Sale - viable alternative to 1031?

[Debbie C.]

Does anyone know how difficult it is to do a monetized installment sale as an alternative to 1031 for deferring capital gains taxes? My CPA and real estate agent don’t know anything about it, and I don’t know how get started even if I wanted to do something like this. I’ve only read some information online describing how it works and it seems rather confusing. But if it does truly achieve a 30 year deferral then it’s something that I’d prefer doing over a 1031.

[Bill Exeter]

Hi @Debbie C., 

The California Franchise Tax Board issued Notice 2019-05 stating installment sale "arrangements" designed to defer taxes when a 1031 Exchange fails will not defer taxes. Here is a quote right out of the Notice: 

"FTB is aware of arrangements in which a taxpayer or QI attempts to convert proceeds from a failed like-kind exchange, or the unreinvested portion of proceeds from a partial like-kind exchange, into an installment payment structure such as an installment note or similar arrangement in which payments are to be paid out over two or more years (the "Transaction"). These arrangements do not allow for a deferral of gain recognition under Internal Revenue Code ("IRC") sections 453 and 1031 since, among other reasons, these sections and the federal doctrine of constructive receipt do not support such a deferral of gain recognition."

You need to be very careful with these types of arrangements, especially if you are a California resident.