Watch the full interview: The Ultimate Capital Gains Deferral Strategy for CA Homeowners (YouTube)
Quick Answer
A structured installment sale lets you sell an appreciated property but receive the proceeds over a schedule you choose — 5, 10, even up to 50 years — instead of all at once. Because you only pay capital gains tax on the portion you receive each year, you can drop into lower tax brackets and earn interest on the full sale amount. Unlike seller financing, the payments come from a highly rated life insurance company, not the buyer. It’s based on Internal Revenue Code Section 453.
How much capital gains tax does a California seller pay?
John Dudek of Dudek Kelly broke down the top combined rate for California:
| Tax | Rate John cited |
|---|---|
| Federal long-term capital gains | 20% |
| California state income tax (top bracket) | 13.3% |
| Net Investment Income Tax | 3.8% |
| Combined top rate | About 37.1% |
On a $2 million gain, that’s roughly $750,000 in tax, according to John. I gave the example on camera of a Pasadena home bought about 40 years ago for around $300,000 that’s now worth close to $3 million — that kind of gain is not unusual in our area.
How is a structured installment sale different from seller financing?
Both use the installment method under IRC §453: if you receive at least one payment in a tax year after the sale, you pay capital gains tax only on what you receive each year.
The difference is who pays you:
- Traditional installment sale (seller financing): the buyer pays you over time. If the buyer stops paying, you’re the one foreclosing.
- Structured installment sale: the buyer pays the full price at closing. The payment obligation is assigned to a third party, which buys an annuity from an A+ rated life insurance company. John’s primary partner is MetLife, which he noted has been operating since 1868 and has never missed a payment. He also works with Independent Life and an administrator called Structures Inc.
How does the process work?
- Plan before you list. The listing should state that the seller wants a structured installment sale and that offers should be willing to sign the addendum.
- Buyer and seller sign the purchase agreement plus an addendum acknowledging periodic payments.
- The buyer assigns the payment obligation to an assignment company. The buyer’s role ends at closing — they own the home like any other buyer, with or without a mortgage.
- Escrow sends the funds to the insurance company instead of to the seller. John works with First American, which has vetted the process.
- The seller receives payments on the schedule they chose.
John estimated the extra paperwork adds about two weeks to a normal escrow.
What do the numbers look like?
John’s case study: an 80-year-old widow moving into assisted living. The home was bought for $150,000 in 1982. Her husband passed in 2005, giving her a partial step-up in basis to $625,000. The home is now worth $2 million. After closing costs and exclusions, about $1 million is taxable gain.
| Lump-sum sale | Structured over 10 years | |
|---|---|---|
| Taxable capital gain per year | $1,000,000 in one year | $100,000 per year |
| Tax at sale | Up to about $371,300 | Spread over 10 years, at lower brackets |
| Yearly payment received | — | $240,500 ($200,000 principal + $40,500 interest) |
| Total received | $2,000,000 before tax | About $2,405,000 before tax |
By keeping each year’s gain far lower, John explained, she can largely avoid the top federal capital gains bracket, pay less California tax, and potentially eliminate the 3.8% Net Investment Income Tax.
Who is a structured installment sale best for?
John described these situations:
- Seniors downsizing or moving to assisted living who want predictable monthly income.
- Primary-residence sellers who can’t use a 1031 exchange (1031s are for investment and business property only).
- Investors with no heirs, who don’t benefit from holding until death for a step-up.
- Business owners selling a company they built — there’s no 1031 equivalent for a business sale.
- “Gray divorce” — couples selling a long-held home or rental, since divorce doesn’t trigger a step-up.
- Buyers in multiple-offer situations. John’s clever idea: offer to sign a structured-sale addendum to make your offer stand out to a seller with a big gain.
What are the limitations?
- The payment schedule is permanent. You can’t pay a penalty to cash out early. Choose the length carefully.
- You don’t have to defer it all. You can take part of the proceeds in cash at closing and pay tax on just that portion.
- Minimum $500,000 deferred; no maximum; payments can run up to 50 years.
- Returns are modest. The fixed option tracks roughly the 10-year Treasury — John cited about 4% — with an index-linked option also available.
- Not for publicly traded stock or depreciable property sold to a related party.
- Depreciation recapture on investment property is still taxed in the year of sale.
On liquidity, I asked John whether a lender would count the annuity as income to qualify for a new mortgage. He said he has seen it done — guaranteed income from an A+ insurer is the kind of asset lenders like — though it’s up to each lender.
Isn’t this the same as Prop 19?
No — I see this confusion all the time with older clients. Prop 19 is about property tax: eligible seniors can transfer their low assessed value to a replacement home. A structured installment sale is about capital gains (income) tax on the profit when you sell. Different taxes, different tools — and some sellers may be able to use both.
For a strategy that can eliminate the gain at sale instead of spreading it out, see my interview on charitable remainder trusts.
Frequently Asked Questions
What is a structured installment sale?
A sale where the buyer pays in full at closing, but the proceeds go into an annuity from a life insurance company that pays the seller over a schedule they choose, spreading the capital gains tax over those years.
Is a structured installment sale legal?
Yes. It’s based on the installment-sale rules in IRC Section 453, which John noted have been in the tax code for decades.
Does it eliminate capital gains tax?
No — it defers and spreads it. At worst you avoid one huge tax year; at best you drop into lower brackets and pay meaningfully less overall.
Can I use it on my primary residence?
Yes. That’s one of its biggest advantages, since a 1031 exchange is only for investment or business property.
Does the buyer have to pay me over time?
No. The buyer pays in full at closing and has no ongoing obligation. They just sign an addendum.
What’s the minimum amount?
John said the minimum is $500,000, with no maximum.
Can I get my money early if I need it?
No. The schedule is fixed by contract. You can, however, take part of the proceeds in cash at closing.
What happens if I pass away during the payout?
Your named beneficiaries continue receiving the remaining payments. You can change beneficiaries at any time.
What interest rate does it pay?
The fixed option tracks roughly the 10-year Treasury — John cited about 4% at the time of the interview. An index-linked option is also available.
When should I start planning?
Before you list. The listing needs to tell buyers you’re doing a structured sale, and the escrow company must be set up for it.
Guest
John Dudek, Dudek Kelly — DudekKelly.com · Phone: 401-524-4022 · Email: jdudek@dudekkelly.com
Disclaimer: This article summarizes an interview for general educational purposes. Will Flannigan is a licensed California real estate agent, not a tax advisor, financial planner, or practicing attorney, and nothing here is legal, tax, or financial advice. Figures are examples and opinions shared by the guest and may not apply to your situation or reflect current law. Consult a qualified attorney, CPA, or financial professional before acting.
About Will Flannigan
Will Flannigan is a Certified Trust & Probate Specialist (CTPS) with The Nell Team at Equity Union Real Estate, representing buyers and sellers across Burbank, Glendale, Pasadena, and greater Los Angeles since 2014. A former attorney who later led a nine-agent sales team as Sales Manager at Keller Williams Burbank, Will specializes in trust and probate sales, equestrian properties in the Burbank Rancho, and helping homeowners downsize — and serves Mandarin-speaking clients in fluent Mandarin. He hosts “The Fine Print,” an interview series connecting homeowners with attorneys and financial professionals.
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Will Flannigan · DRE #01951292 · The Nell Team at Equity Union Real Estate