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Installment Sale for 1031 Boot: Section 453(f)(6) Carve-Outs

By Hans Goldstein · Updated 2026-09-27

Yes, boot in a 1031 exchange can be taken on the installment method. Section 453(f)(6) lets the taxable slice of an exchange be reported as it is paid, while the rest of the gain stays deferred in the replacement property. The catch is timing: the installment piece has to be written into the deal and carved out at closing. Once exchange money sits with the qualified intermediary, the option is gone.

This page is written for sellers, 1031 professionals, brokers and CPAs. It covers the statute, the closing mechanics, where the losses come from, the honest answer on a "failed 1031 rescue," and the lines not to cross.

The problem: boot taxed all at once

Most exchanges leak. A smaller replacement, a smaller loan, some cash out. Anything that is not like-kind real estate is boot, taxable up to your gain. Taken as cash, it is taxed in one year on top of your other income, and for a depreciated building the recognized gain generally lands first in the unrecaptured §1250 layer (up to 25% federal). For a top-bracket Californian that layer can cost up to 42.1 cents on the dollar (25% + 3.8% + 13.3%, a ceiling). See 1031 boot for what counts and why it happens, and depreciation recapture in a 1031 exchange for how recapture comes out first.

Section 453(f)(6): like-kind property is not a "payment"

Section 453(f)(6) adapts the installment rules to an exchange under §1031(b):

• Contract price is reduced by the like-kind property you receive without recognizing gain.
• Gross profit is reduced by the gain not recognized under §1031(b).
• "Payment" does not include the like-kind property.

The result: basis goes to the replacement real estate first. When your gain is larger than the boot, contract price equals the boot and gross profit equals the recognized gain, so each principal dollar of the note carries about a dollar of gain. The Form 8824 instructions send the installment computation to Form 6252.

A simple example: You sell for $3,000,000 with a $1,000,000 adjusted basis and no loan: a $2,000,000 gain. You exchange into a $2,000,000 replacement and take the other $1,000,000 as a note paid over 10 years. Recognized gain is capped at the $1,000,000 of boot. The replacement's value is excluded from contract price, so contract price and gross profit are both $1,000,000: a 100% gross profit ratio. Each year about $100,000 of principal brings $100,000 of gain, instead of $1,000,000 in year one. The other $1,000,000 of gain stays deferred in the replacement (simple example, ignoring selling costs).

Cite the statute. A proposed regulation is often quoted for the same basis-allocation result, but its text could not be verified from a primary source, and §453(f)(6) is binding.

How the QI rules treat a note

The exchange regulations coordinate with §453 in Reg. §1.1031(k)-1(j)(2):

• The QI is not your agent for §453 purposes while the exchange is pending ((j)(2)(ii)). The relief ends at the earlier of the (g)(4)(vi) date or the end of the exchange period.
• The buyer's note received through the QI is treated as the buyer's own note to you ((j)(2)(iii)).
• You need a bona fide intent to do a deferred exchange at the start of the exchange period ((j)(2)(iv)).

That (j)(2)(iii) rule covers only the obligation of the person who bought your property. It does not reach a third party's obligation. That matters for a structured installment sale.

How it is done without breaking the exchange

There are two ways to take the boot over time:

1. The buyer's note (seller financing). The buyer owes you the boot and pays over years, secured by the property. It fits (j)(2)(iii) directly. You carry the buyer's credit risk, and a buyer who refinances can pay you off early, which brings the rest of the gain into that year.
2. A structured installment sale. The buyer pays the full price at closing and a third-party assignment company takes on the deferred payments, usually funded by a fixed annuity it owns (some programs use a funding agreement). You are an unsecured creditor of the assignment company, the schedule cannot be sped up, the commission is built into the pricing, and no IRS ruling specifically approves the structure. It relies on the general §453 rules.

For the structured version, the mechanics are strict:

• Carve it out at closing. The structured portion is written into the purchase contract, the exchange agreement and the escrow instructions. Escrow wires it directly to the assignment company at closing.
• It never touches the intermediary. Money that passes through the QI, or exchange funds you can direct, risks the restrictions on receipt in Reg. §1.1031(k)-1(g)(6), and with them the entire exchange, not just the boot.
• Get sign-off before you list. Some intermediaries will not allow a carve-out. Bring in exchange counsel early.
• Size it to boot you are sure of. The slice is fixed at the relinquished closing. If a great replacement turns up on day 30, the structured money cannot be reinvested. If the replacement closes for less than planned, the difference is cash boot.

In practice you need to know the replacement before the sale closes: under contract, or identified at a price you trust. A reverse exchange, buying first, removes the guesswork.

Where the losses come from: the new building

The waterfall idea is that each year's slice of boot gain meets passive losses (see suspended passive losses when selling a rental). In an exchange, those losses often come from the replacement property.

The replacement's basis splits in two (Reg. §1.168(i)-6):

• Exchanged basis carries over from the old building and keeps its old depreciation schedule. For used property it gets no bonus depreciation.
• Excess basis, funded by new debt or new cash, is treated as newly placed in service ((d)(1)). A cost segregation study can split it into 5-, 7- and 15-year parts, which qualify for 100% bonus for property acquired after January 19, 2025.

If the replacement is brand new (never placed in service by anyone), the short-life parts of the exchanged basis can take bonus too (Reg. §1.168(k)-2(g)(5)(iii)(A)). For a passive investor, the resulting loss is passive, and so is the boot gain. They meet.

No new debt and no new cash means no excess basis, and then there are no new losses for the note to meet. A loan taken after the exchange adds no basis.

How it plays out: three illustrative cases

The book ran three exchanges on its engine. Each is an illustrative composite, not a real client; net position after 10 years:

In Case 3, the new building's bonus losses swallowed the early slices: year-1 tax on the gain was $0k structured against $271k with cash boot. In Cases 4 and 13, the losses added nothing; the edge was spreading and deferral. Structure the boot you cannot or will not avoid, not boot you create. If you do not need money out, a full exchange beats both.

The honest answer on a "failed 1031 rescue"

The 45 days ran out, or the replacement fell through, and the money is with the QI. Can an installment sale save it?

No. Cash the QI releases is a payment when you receive it. If the exchange began with bona fide intent and fails across year end, the gain can be reported in the year the cash is released rather than the year of sale (Reg. §1.1031(k)-1(j)(2)). That is the only relief. An installment slice has to be in the contract before the relinquished property closes.

The rescue happens before closing, never after. For any client who may not find a full-value replacement, the time to discuss a slice with the CPA and exchange counsel is before the contract is signed.

Compliance lines not to cross

• No tax advice without a license to give it. "Here is an option to ask your CPA about" is fine. "This will save you $200,000" is not.
• No soliciting or selling an annuity without an insurance license. In California, soliciting or negotiating insurance requires a license (Ins. Code §§35, 1631), and doing it unlicensed is a misdemeanor (§1633); commission-sharing rules vary by state. CPAs face their own referral-fee rules (Cal. Bus. & Prof. Code §5061).
• Don't confuse the products. A Delaware Statutory Trust interest is a security. A structured sale's annuity is insurance.
• Keep the client's hands off the money. Money set aside that the seller can draw on is taxed as received (Reg. §1.451-2(a)). Pledging or borrowing against the obligation is treated as a payment (§453A(d)).
• Don't promise the result. No ruling approves the structure; the client's own tax attorney should read the documents.
• Settle state withholding before closing. California withholds on boot and on each later principal payment (Form 593).

Bottom line

Section 453(f)(6) lets 1031 boot be taxed as it is paid instead of all at once, and because basis goes to the replacement first, each principal dollar is close to a dollar of gain, clean for matching against losses. The slice must be set at closing and kept away from the intermediary. After closing, there is nothing to structure. Model it in the 1031 boot calculator, read the practitioner chapters in the free book, and see the neutral overview of structured installment sales.

Questions to ask your CPA

• How much of this exchange will be boot no matter what we buy?
• Will our QI allow a carve-out, and who drafts the contract, exchange agreement and escrow language?
• Is the boot a buyer's note, or a third party's obligation, and how does that change the analysis?
• How much excess basis will the replacement have, and what will a cost segregation study show?
• Is any §1245 recapture triggered, including under §1245(b)(4)?
• What are the federal and state tax each year on cash boot versus boot spread over the note?
• What happens if the replacement closes for less than planned?

Educational only, not tax, legal or investment advice. Examples are illustrative. Have your CPA or tax attorney review your facts before you act. Hans Goldstein is a licensed insurance agent (CA Insurance License #4273294) and is not a CPA or attorney. He is paid a commission only if a structured installment sale is funded; seller financing pays him nothing. Disclosures.