Your stuck real estate losses are coupons. Find out what yours are worth.

Hans Goldstein, who publishes this book as Hans Goldstein: Tax & Exit Planning, reviews structured installment sales for owners selling appreciated real estate or a business, working alongside their CPA and attorney. The structure has to be in place before closing. Email hans@goldsteinco.net or call or text 213-414-2808. Hans Goldstein is a licensed insurance agent (CA Insurance License #4273294) and may discuss insurance products, including annuities; insurance is offered through Goldstein & Co. LLC dba Goldstein Insurance Services.

Rental and other passive losses you could not deduct in the year they arose because you had no passive income to absorb them and did not qualify for the $25,000 allowance or real estate professional status. They carry forward on Form 8582 until you have passive income or sell the activity (IRC §469(b)).

Selling your entire interest in the activity to an unrelated buyer in a fully taxable sale releases them under IRC §469(g). They are treated as nonpassive and can offset other income, subject to later limits such as the excess business loss cap. A 1031 exchange, a related-party sale, or selling one building from a grouped or aggregated activity does not trigger the release.

For federal income tax it can work in principle, but it rarely lands exactly, and it spends every loss at once. Cash or debt relief taken out of an exchange (boot) is taxed as gain. That gain is passive income, so suspended passive losses offset it (Treas. Reg. 1.469-2T(c)(2)). It is an offset, not a release under IRC §469(g). Three things get in the way of an exact match. The loss balance is not final until that year's Form 8582 is done, because the year's results from every passive activity you own are netted in. Boot is not final until closing, and a smaller loan on the replacement property counts as boot too. And your state may carry a different loss balance: California keeps its own. The larger cost comes later. Once all the boot is taken in year one, the losses the replacement property produces afterward have no passive income to meet. A hypothetical: $500,000 of boot gain in 2026 against $400,000 of suspended losses, with $20,000 of new losses a year, uses $420,000 in 2026, and $80,000 is suspended again by 2030. The same boot paid over five years uses all $500,000. For someone doing a 1031 exchange, taking the boot as a structured installment sale instead of cash is often the simplest way to do that: gain shows up every year, and each year's losses have something to meet. Only the gain part of each payment counts. The interest part is portfolio income and does not absorb passive losses (IRC §469(e)(1)). It has to be written into the sale before closing. 2026 law. Hypothetical. Not tax advice. Talk to your CPA before acting.

Because in a trade-down it usually cannot. In a 1031 exchange the replacement property's basis is your old basis, less cash received, plus gain recognized (IRC §1031(d)), so cash boot leaves you with carried-over basis only. For used property, bonus depreciation reaches only the excess basis, the new money above that carried-over basis (Treas. Reg. 1.168(k)-2(g)(5)(iii)), and the election under Treas. Reg. 1.168(i)-6(i) does not change that. A hypothetical: sell for $3,000,000 with a basis of $800,000, buy $2,500,000 and take $500,000 of boot, and the excess basis is $0. It can work when you trade up with new money: buy $3,500,000 with $1,000,000 of new debt, still take the $500,000, and the excess basis is $1,000,000. At an assumed 15% to 30% cost segregation share, that is a first-year loss of $150,000 to $300,000, passive against the passive boot gain. Think of it as dynamite, one blast in year one. A waterfall is the steady flow: gain arriving year by year meets each year's losses, including the later years' new losses that a year-one cash boot would leave stranded. So the rule is sizing: take cash up to what year-one losses can absorb and the rest over time. Dynamite also leaves new debt, no bonus in California, less depreciation later and ordinary-rate recapture on a later sale (IRC §1245, §453(i)). 2026 law. Hypothetical. Not tax advice. Talk to your CPA before acting.

Against selling for cash, or taking all the boot in cash, a 1031 with the cash part taken as an installment boot won every case an independent check ran on October 10, 2026. Against a 1031 followed by a loan it depends on growth and on how long you live. A hypothetical: a $3,000,000 California rental, basis $800,000, $300,000 of suspended passive losses and $20,000 of new loss a year. The best structure is not a long note. Take cash at closing equal to the losses on hand plus the first year's loss ($320,000), then each year's new loss, never more than the pool: $500,000 in all, sized so the losses cancel the gain. At the top bracket the allowed loss comes off ordinary income while the matched gain is taxed at no more than 25%, about 12 cents back per dollar of gain covered; at mid and retiree incomes it nets to zero, and no owner gets the 0% rate on this gain. The interest on the note is ordinary income, taxed each year. Assumptions: a 7.5% rental-property loan with a 1% fee (the home equity line average is 7.33%, Bankrate, October 7, 2026; the 30-year home loan 7.40%, Freddie Mac, October 8, 2026), a 5.0% cap rate (Kidder Mathews, Orange County, Q2 2026) less a 0.5% capital reserve, 5.0% on the unpaid balance and a 2% structured-sale fee, all assumptions. Dying holding the property, the playbook is ahead of borrowing below about 2.6% to 3.0% price growth a year (a long level note, about 2%); if the owner sells in life the lines are 5.7% to 6.8% (level note 3.8% to 4.4%). The loan is ahead above those lines, at 5% growth, and when death comes within about 7 years, because the unpaid note gets no step-up (IRC §1014(c), §691(a)(4)). Wealthy borrowers on a 5% to 6.3% securities-backed line or margin loan lower the break-even to about 0.3% to 1.4%. At 7.5% the rent on the part of the building you keep stops covering the loan interest in about year 6. A debt-free building cannot also produce $20,000 a year of new losses, so the pool has to come from other holdings, leverage or cost segregation; confirm it with your CPA. The boot is only as big as the losses allow. 2026 law. Hypothetical. Not tax advice. Talk to your CPA before acting.

The sold building's own suspended losses come out in any fully taxable sale of your entire interest; on an installment sale they come out in proportion to the gain each year (§469(g)(3)). The waterfall is about the other losses: those on rentals and K-1 deals you keep, which need passive income to be used. Installment gain supplies that income year after year.

Yes, if the property was a passive activity in the year of sale: all gain on selling a passive rental, including depreciation recapture, is passive income under Temp. Reg. §1.469-2T(c)(2)(i)(A). Released losses also come off ordinary income first under §1(h)(1).

At 2021’s 3% loans, trading up in a 1031 and borrowing looked brilliant. At today’s 7% and up, a California building’s rent is small next to its price and growth is moderate, so it earns about what the loan costs. In the book’s model runs, heirs-first owners with solid rent may still do better borrowing; sellers who want to spend, simplify or get out usually do better with an installment sale. The numbers today, not a forecast.

Real estate professionals whose losses already offset other income, owners whose losses are already being used, sellers who need all the cash now or have already closed, owners holding until death for the step-up, and dealers. The book shows three cases where it fails.