Structured Installment Sales + Delaware statutory trusts: How to Sell Appreciated Property Without the Tax Bomb

Why a lump-sum sale is so expensive

Consider a California couple selling a long-held rental property: $300,000 cost basis, $1,800,000 sale price, $1,500,000 capital gain. Conventional sale, all recognized in one year.

The example, stated once: married filing jointly, both 70 and on Medicare, California residents, with $100,000 a year of other taxable income (pension and IRA withdrawals) in every year. The sale closes in 2026 with no mortgage and no selling costs, and we treat the whole $1.5M as long-term capital gain (a depreciated rental would also have some gain taxed at up to 25%, which raises every column). Taxes use 2026 federal rules, including the alternative minimum tax and the senior deduction, and California's 2025 rate schedule (the 2026 schedule, published by the Franchise Tax Board in October 2026, lowers the California lines by about $1,200, less than 1%); IRMAA uses the 2026 CMS brackets and is charged two years after the income year. Later years are held at those rules. Every figure is the tax the sale adds on top of what the couple would owe anyway.

The tax stack on that $1.5M gain in 2026:

• Federal long-term capital gains: About $34,400 of the gain fits in the 0% bracket and the next $514,800 is taxed at 15%; the rest (about $950,800, everything above $613,700 of taxable income) is taxed at 20%. The sale also wipes out the couple's $12,000 senior deduction for the year. About $268,800, or 17.9% of the gain.
• Federal alternative minimum tax (AMT): At this income the AMT exemption phases out completely (it is gone above about $1.28M for a couple), so the AMT adds about $18,800 on top of the regular tax.
• Federal Net Investment Income Tax (NIIT): 3.8% on the smaller of the gain or the amount by which MAGI tops the $250,000 MFJ threshold. Here that is 3.8% of $1,350,000: $51,300.
• California state tax: CA taxes capital gains as ordinary income, with no preferential rate. Most of this gain is taxed at 9.3% to 11.3%; only the top slice reaches 12.3%, plus the 1% Mental Health Services Tax on income above $1 million (13.3% at the very top). Effective state tax: about 10.7% of the gain, or about $160,600.
• IRMAA spike (2 years later): The $1.5M+ MAGI puts you firmly in IRMAA Tier 5 for the year. A couple both on Medicare pays $13,872 of extra Medicare premium for that one year ($578.00 a month each in Part B and Part D surcharges at 2026 rates, or $6,936 per person).

Combined tax + IRMAA bill: about $513,000 ($499,446 of income tax plus $13,872 of IRMAA) on a $1,500,000 gain. The couple keeps about 66% of the appreciation.

This is what we'll call the "tax bomb" baseline. Every strategy below measures itself against this number.

The Structured Installment Sale (Section 453)

Section 453 of the Internal Revenue Code is a 100+ year-old provision that allows sellers of property to recognize the capital gain as the payments are received, rather than all at once at closing.

The classic seller-financed installment sale (Mom-and-Pop holds a note for the buyer) qualifies under Section 453, but it requires the seller to take on credit risk and asset-management duties for years or decades. Most sellers don't want that.

The Structured Installment Sale (SIS) is one answer. The buyer pays cash at closing. The cash goes to a third-party "assignment company." The assignment company then pays the seller on a customized fixed schedule, say $360,000 a year for 5 years or $180,000 a year for 10 years on this $1.8M sale (plus interest), or whatever the seller chooses. The schedule is fixed in the contract and does not depend on the buyer's credit.

From the seller's tax perspective: the gain is recognized as the payments arrive, prorated against the cost basis (here $300,000 of each $360,000 is gain and $60,000 is basis coming back). From the buyer's perspective: it's a normal cash sale.

The 5-year SIS spread keeps annual capital gain recognition at $300K instead of $1.5M. That single change ripples through every other tax decision: lower brackets, lower NIIT exposure, lower IRMAA tier, lower state tax bracket.

How SIS interacts with IRMAA

The IRMAA interaction is one of the most undersold benefits of the SIS. A $1.5M gain recognized all at once puts a Medicare-age couple firmly in IRMAA Tier 5 for that year, costing $13,872 of extra Medicare premium for a couple ($6,936 per person) at 2026 rates.

A 5-year SIS that spreads the gain into $300K annual recognitions (MAGI about $400,000 with the couple's other income) lands in IRMAA Tier 3, costing $9,240/year extra for a couple. Over 5 years that's $46,200.

A 10-year SIS at $150K annual recognition (MAGI about $250,000) lands in IRMAA Tier 1, costing about $2,297/year extra for a couple. Over 10 years that's about $22,968.

A Delaware statutory trust (next section) defers the recognition entirely, so IRMAA stays at baseline.

Notice which way the totals run. Because the lump sale triggers the surcharge for only one year, spreading the gain can cost more IRMAA in total: $46,200 over 5 years and $22,968 over 10 years, against $13,872 for the lump sale. Both schedules still come out well ahead, because the income tax they save ($134,271 for the 5-year SIS, $194,917 for the 10-year) is several times the extra IRMAA. The longer schedule wins on both counts here: the 10-year SIS pays about half the IRMAA of the 5-year one and less income tax. One thing to know: the interest the payments earn also counts toward IRMAA, so a real schedule can land a tier higher than these gain-only figures.

The Delaware Statutory Trust and 1031 exchange

The 1031 exchange (Section 1031) lets you defer all capital gain by reinvesting sale proceeds into another "like-kind" real estate property within strict timelines (45 days to identify, 180 days to close). For real estate-to-real estate exchanges, this works well, but most retirees don't want to actively manage a new property.

The Delaware statutory trust is one answer. A Delaware statutory trust is a passive ownership structure that holds institutional-grade commercial real estate (apartments, industrial, medical office, single-tenant net-lease properties, etc.). You exchange into a fractional ownership of the Delaware statutory trust. The Delaware statutory trust sponsor manages the property. You receive monthly distributions and depreciation pass-through. No active management on your part.

The result: you defer the entire $1.5M capital gain. Your cost basis carries over into the Delaware statutory trust shares. You collect income from the Delaware statutory trust. When you eventually die holding the Delaware statutory trust, your heirs receive a full step-up in basis, meaning the deferred gain disappears entirely.

Delaware statutory trusts aren't free. They have sponsor fees, less liquidity than direct ownership, and exposure to commercial real estate market risk. But for retirees looking to exit hands-on landlording without triggering a tax bomb AND maintain real estate income, the Delaware statutory trust is one way out.

Total after-tax wealth comparison

Same $1.5M capital gain. Same California couple on Medicare. Four strategies. Tax and IRMAA caused by the sale, and what is kept:

Sources, checked October 10, 2026: 2026 federal brackets, standard deduction and AMT exemption, IRS Rev. Proc. 2025-32; 3.8% tax, IRS; senior deduction, IRS; 2026 Medicare IRMAA amounts, CMS.

Gain-only comparison: the interest a structured schedule pays, and the yield the cash-sale proceeds would earn if invested, are left out of both sides; both are taxed as ordinary income when received. Delaware statutory trust distributions, fees and property results are also left out.

The lump-sum sale keeps about $987K of the $1.5M (66%). The 5-year SIS keeps about $1.09M (73%), about $102K more. The 10-year SIS keeps about $1.17M (78%), about $186K more. The Delaware statutory trust defers the entire $1.5M and steps up at death, meaning the heirs receive the full gain tax-free.

The Delaware statutory trust strategy depends critically on actually holding the position until death. If the seller has to sell Delaware statutory trust shares later (unforeseen liquidity need), the deferred gain comes due at that point. For retirees with a clear "hold to step-up" plan, the Delaware statutory trust defers the most tax. For retirees who may want flexibility, the 10-year SIS often wins.

When each strategy is the right fit

The right tool depends on the seller's situation:

Lump-sum sale

• Small gains where the spread benefit is small
• Seller is in the 0% LTCG bracket (taxable income under $98,900 MFJ in 2026; less room once Social Security is being drawn, because gains make more of the benefit taxable)
• Seller needs all proceeds immediately for another purpose

Structured Installment Sale (Section 453)

• Gain is $500K+, large enough that spreading matters
• Seller wants the cash spread out as income (e.g., to replace earned income in retirement)
• Seller wants flexibility to take a fixed-schedule payment without managing real estate
• Seller is comfortable with a 5-10 year payment commitment from an insurance-company-backed assignment

Delaware statutory trust 1031 Exchange

• Gain is substantial AND seller wants to maintain real estate exposure for income
• Seller plans to hold until death to capture step-up basis
• Seller is comfortable with commercial real estate market risk
• Seller wants to fully exit active landlording without active reinvestment

Hold to death (no sale)

• Seller doesn't need the liquidity
• Property is generating acceptable income
• Heirs will receive a full step-up in basis at death
• Often the cleanest answer when applicable

For California retirees with appreciated rental property, the most common right answer is "hold to death if you can, structured installment sale if you can't, Delaware statutory trust if you want continued real estate income without active management." In this example, each one beats the lump-sum default.

What to actually do

If you have appreciated real estate you're considering selling, the priority list:

1. Calculate your embedded gain. Current sale value minus cost basis (including depreciation recapture). Anything over $250K-$500K of gain warrants exploring SIS or Delaware statutory trust.
2. Decide your liquidity needs. Do you need the cash immediately for retirement income, a property purchase, or something else? Or could the cash arrive over 5-10 years as planned income?
3. Map your post-sale tax bracket. What other income are you generating in the sale year, and the years following? This determines whether spreading helps and by how much.
4. Get the terms in writing. For a structured sale that means the payment schedule, the effective interest rate and who is obligated to pay. For a Delaware statutory trust it means the private placement memorandum, with every fee and the loan terms. Compare more than one provider.
5. Coordinate with your tax professional. Both SIS and Delaware statutory trust have specific documentation and timing requirements. Mistakes here can void the tax treatment.

The workshop linked below walks through SIS and Delaware statutory trust scenarios for common California real-estate-rich retiree situations.

Hans Goldstein, EA

Founder & Executive Director · Retirement Literacy Foundation, a 501(c)(3) non-profit
Admitted to practice before the IRS

Want more information on this? Put your name below and I’ll send it over in plain English, at no cost. If your situation has a wrinkle, reply to the email and tell me what it is; I read them.

You’re reading: Structured Installment Sales + Delaware statutory trusts: How to Sell Appreciated Property Without the Tax Bomb

First name Email Send me more information

Free education. The Foundation sells nothing. By submitting you agree to receive free educational emails. We never sell or share your information and you can unsubscribe from any email.