The short answer
A 1031 exchange defers tax because a statute says so, but it gives you real estate, not cash. A monetized installment sale promises both cash now and deferral for decades, and that combination is exactly what Treasury's August 2023 proposed regulation calls abusive: it would make the transaction and anything substantially similar a listed transaction, with the IRS arguing the loan proceeds are payment for the property. As of our review the proposal has not been finalized, but the IRS has said it will take that position in litigation. If you want liquidity and deferral together, the lawful routes are borrowing against property you already own, a partial exchange, or a real installment sale whose note you do not borrow against.
At a glance
| Proposed listing | Published August 4, 2023; effective only when adopted as final |
|---|---|
| Status at review | No final Treasury decision found in the Federal Register |
| IRS litigation position | Taxpayers are not entitled to the purported deferral |
| Pledge rule | Borrowing secured by an installment note over a $150,000 sale is treated as payment |
| Interest charge | Applies when such notes arising in the year exceed $5,000,000 at year-end |
| Disclosure penalty | 75% of the tax decrease; for an individual, $5,000 minimum and $100,000 maximum on a listed transaction |
| 1031 trade-off | Full deferral, but every dollar goes into replacement real property |
The two promise different things: deferral with reinvestment, or deferral with cash
A section 1031 exchange defers gain only on real property exchanged for like-kind real property, so the money stays invested. Cash you keep is boot and is taxed.
A monetized installment sale, as Treasury's proposed regulation describes it, inserts an intermediary between you and a buyer you already have. You sell to the intermediary for an interest-only installment note, the intermediary resells to your buyer for about the same price, and a third party lends you roughly the sale price less fees on a non-recourse loan, with the intermediary's note payments matching your loan payments. You get cash now and report gain only as the note pays off, often decades later.
The question for a seller is not which is cleverer. It is whether getting cash and deferral at once is something the law allows. Our deferred sales trust guide walks through Treasury's step-by-step description in more detail.
Why the IRS says the cash is payment: three arguments in the proposed regulation
First, the intermediary is not a bona fide buyer. The proposal says it is interposed after you have decided to sell and negotiated the price, neither enjoys the benefits nor bears the burdens of ownership, and resells for about the same amount.
Second, the loan is treated as payment. The proposal argues the buyer's cash, held to fund the loan, is in substance paid to you; or the loan is not a bona fide loan; or the pledging rule in section 453A(d) treats you as fully paid when you receive the loan proceeds. That rule says that net proceeds of indebtedness secured by an installment obligation from a sale over $150,000 are treated as a payment on the obligation.
Third, the whole arrangement may be disregarded under the economic substance rules of section 7701(o), substance over form, or the step transaction and conduit doctrines. If any argument wins, the gain lands in the year of sale, with interest and possibly penalties.
Where the rule stands now, and why waiting for a final rule is not protection
The proposed rule says the listing would take effect when a Treasury decision adopting it as final is published. A search of the Federal Register at our review date found the 2023 proposal and an October 2023 hearing cancellation notice, and no final rule.
That does not make the transaction safe. The preamble says the IRS will take the position in litigation that taxpayers are not entitled to the purported benefits, and invites past participants to correct by amended return or other means. Treasury also asked whether the buyer should be treated as a participant.
If finalized, the costs grow. The preamble summarizes them: a section 6707A penalty of 75% of the tax decrease for failing to disclose on Form 8886, with a $5,000 minimum and $100,000 maximum for an individual in a listed transaction; a section 6662A accuracy penalty of 20%, or 30% if not disclosed; and under section 6501(c)(10), an assessment period that stays open until one year after the transaction is disclosed.
A worked comparison on a hypothetical $2,000,000 sale with a $1,000,000 gain
Hypothetical, round numbers. Exchange: the $2,000,000 is reinvested in replacement real property, the $1,000,000 gain is deferred, and you have no new cash. Monetized installment sale as pitched: you receive a loan near $2,000,000 less fees and report nothing this year. If the IRS's position prevails, the full $1,000,000 gain is taxable in the year of sale, the fees are spent, and penalties may be added.
Genuine seller financing: your buyer pays $400,000 down and gives you a $1,600,000 note. Under section 453 you report gain as principal arrives, and with only $1,600,000 of such notes outstanding at year-end, the section 453A interest charge, which applies above $5,000,000, does not. But the moment you borrow against that note, section 453A(d) treats the loan proceeds as payment.
So the lawful versions sort neatly: deferral with reinvestment, or deferral with waiting. Run your own numbers with your CPA.
Lawful ways to combine deferral and liquidity
Borrow against property you own, before or after an exchange. As the Supreme Court explained in Commissioner v. Tufts, loan proceeds are not income because you must repay them. A refinance of replacement property after the exchange, with its own timing considerations, is covered in pulling cash out after a 1031.
Take a partial exchange: keep the cash you need, pay tax on that boot, and defer the rest. Or use a cash out DST, a highly leveraged, non-recourse structure designed for later liquidity through a refinance rather than current income; read the offering's documents on how that refinance occurs.
Be careful with seller financing inside an exchange: the note must go to the qualified intermediary, as our answer on carrying a note for a buyer explains, and a related-party resale within two years can accelerate gain under section 453(e).
Related questions
Is a monetized installment sale illegal?
It is not a crime to enter one, but Treasury has proposed listing it as a tax avoidance transaction and the IRS says it will deny the deferral in litigation. Treat the deferral as likely to be challenged.
If the regulation is never finalized, am I safe?
No. The IRS's arguments rest on existing law, including section 453A(d), economic substance and substance over form, which apply whether or not the listing is final. Listing mainly adds disclosure duties and heavier penalties.
Can I do a monetized installment sale for the part of my sale that a 1031 does not cover?
The same objections apply to any portion. For boot, lawful options include paying the tax, an opportunity zone fund for eligible gain, or a bonus depreciation fund against passive income.
Does the pledge rule stop me borrowing against a note from a real buyer?
Yes, for sales over $150,000. Section 453A(d) treats the net loan proceeds secured by the note as a payment received, so the gain becomes taxable as if the buyer had paid.
Who else is exposed besides the seller?
Under the proposal, material advisors would have disclosure and list-keeping duties, with penalties under sections 6707 and 6708, and Treasury asked for comments on treating the buyer as a participant.
Sources
Checked against these publications on September 30, 2026. Rules and figures change; confirm the current version with your CPA or attorney before you act. This page is general information, not tax or legal advice.
- Federal Register, Identification of Monetized Installment Sale Transactions as Listed Transactions (proposed, Aug. 4, 2023)
- Federal Register, hearing cancellation notice (Oct. 11, 2023)
- 26 U.S.C. section 453A, special rules for nondealers
- 26 U.S.C. section 453, installment method
- 26 U.S.C. section 6707A, penalty for failure to disclose
- 26 U.S.C. section 6662A, reportable transaction understatements
- 26 U.S.C. section 1031, exchange of real property
- Commissioner v. Tufts, 461 U.S. 300 (1983)