All three defer capital gains tax. Only one works for a business. Only one keeps you out of real estate. Only one gets a step-up at death. The table below is the comparison the brochures leave out.
By Hans Goldstein, EA, founder, Retirement Literacy Foundation · Updated
Admitted to practice before the IRS.
One page that shows every tax layer on your sale: federal capital gains, depreciation recapture, the 3.8% net investment income tax, and state tax.
The comparison
A 1031 exchange, a Delaware Statutory Trust and a Section 453 installment sale all defer capital gains tax. They do it in different ways, for different assets, with different strings attached. Here is the honest side-by-side.
| 1031 Exchange | Delaware Statutory Trust | Installment Sale (Section 453) | |
|---|---|---|---|
| What it is | Sell investment real estate, buy other investment real estate, defer the tax | A 1031 into a fractional share of a large professionally managed property | The buyer pays over time (or a third party pays over time) and you are taxed as the money arrives |
| Works for | Real estate held for investment or business use only | Real estate only, via 1031 | Businesses, practices, land, commercial and residential property, even a primary home above the exclusion. Not inventory or publicly traded stock |
| Deadlines | 45 days to identify, 180 days to close, qualified intermediary must hold the money | Same 45 / 180 clock; Delaware statutory trust sponsors keep inventory ready, which is the appeal | None. Terms are set in the sale contract |
| Tax deferred | All of it, including depreciation recapture, as long as you buy equal or greater value and reinvest all equity | Same as 1031 | Capital gain is spread over the payments. The 25% unrecaptured Section 1250 gain is spread over the payments too; only ordinary-income recapture (Section 1245, IRC 453(i)) is taxed in the year of sale |
| Your involvement after | You own and manage the new property | None. Passive. You cannot vote, refinance or sell your interest easily | You hold a note (or a structured payment stream). No management |
| Income | Rent from the replacement property | Distributions, typically 4% to 6%, not guaranteed | Principal plus interest on the schedule you chose; with a structured installment sale the buyer pays in full at closing and a third party makes the payments |
| Liquidity | You can sell (and pay the tax) or exchange again | Low. Typically locked 5 to 10 years until the sponsor sells | Fixed schedule; a plain seller note can sometimes be sold at a discount |
| Risk | Property and tenant risk, plus missing a deadline | Sponsor, property and interest-rate risk; fees of 8% to 12% are common | Buyer default on a plain note; the third party's credit on a structured sale |
| What happens at death | Heirs get a step-up in basis; the deferred tax disappears | Same step-up | Remaining payments are income in respect of a decedent: heirs pay the tax as payments arrive. No step-up |
| Watch out for | Boot (cash or debt relief taken out is taxed), related-party rules, vacation homes | Illiquidity, fees, sponsors marketing them as income products | Section 453A interest charge on deferred tax when notes exceed $5 million; the IRS Dirty Dozen "monetized installment sale" and "deferred sales trust" structures are not the same thing |
| Best fit | Landlords who want to stay landlords with a bigger or better building | Landlords who want out of management but not out of real estate | Sellers of a business or property who want to stop being owners entirely and control the tax year the gain lands in |
Common questions
No. Since 2018 Section 1031 covers real property only. The real estate inside a business sale can be exchanged; goodwill, equipment and the practice itself cannot. That is why business sellers look at installment sales and charitable remainder trusts instead.
No. A Section 453 installment sale is a 100-year-old part of the tax code with its own IRS form (6252).
"Deferred sales trust" and "monetized installment sale" are promoted arrangements that insert a trust or a lender in the middle to give the seller cash up front while claiming deferral; the IRS put monetized installment sales on its Dirty Dozen list.
A structured installment sale, where the buyer pays cash to an assignment company at closing and a third party pays the seller over time, follows the plain Section 453 rules and has been used since the 1980s.
Every dollar of depreciation you deducted on a rental lowers your basis, and when you sell, that portion of the gain is taxed at up to 25% federal instead of 15% or 20%. On a building held 20 years it is often the bigger number.
A 1031 defers it. An installment sale spreads the 25% slice over the payments, first in line (Treas. Reg. 1.453-12); only equipment-type recapture (Section 1245) is all taxed in the year of sale.
Usually yes, on gains once your income passes $200,000 single / $250,000 married in the year the gain is recognized. Spreading the gain over several years with an installment sale is one of the few ways to keep each year under the line.
Thresholds, examples and Form 8960: the 3.8% net investment income tax explained. How a Delaware statutory trust works, what it costs and its risks: Delaware statutory trust guide.
Enormously. California taxes the whole gain as ordinary income, up to 13.3%, and does not honor a lower rate for capital gains. Texas, Florida, Nevada and a handful of others tax nothing.
Washington does not tax real estate gains; it taxes long-term gains on a business or stock sale above a yearly standard deduction ($278,000 for 2025). California also tracks 1031 exchanges out of state and claws the tax back when the replacement property is sold.
The math starts to move at about a $500,000 gain. Below that, the cost and complexity usually outweigh the savings and the right answer is to plan the year of sale and pay the tax.
Before you compare options, know the number you are trying to defer. This one-page worksheet takes you from purchase price to gain, recapture, NIIT and state tax, then checks tax against cash at closing. Free from a 501(c)(3); nothing to buy.
The Retirement Literacy Foundation is a 501(c)(3) public charity (EIN 41-5062266). General education, not tax advice. We don’t sell financial products. We’ll email it to you. Unsubscribe any time.
Audit trail
Reviewed for the Retirement Literacy Foundation, a 501(c)(3) education nonprofit. Prepared by Hans Goldstein, EA, retirement educator. Admitted to practice before the IRS. Informational only. Not tax, legal or investment advice. Every figure below cites its source so your CPA or attorney can check it.
Figures are 2026 federal and 2026 California amounts unless stated. Examples are illustrative, rounded, and assume no other income; your numbers will differ. Last reviewed October 10, 2026.
Live on Zoom, Thursday, October 22, 2026, 4:00 PM PT / 7:00 PM ET. Big sales and taxes: how to close the deal. 60 minutes plus questions. Free, nonprofit, nothing sold.
Hans Goldstein is an Enrolled Agent, admitted to practice before the Internal Revenue Service. Not affiliated with or endorsed by the IRS.