StructuredSales.org
StructuredSales.org
Selling an apartment complex or multifamily property triggers two separate layers of federal tax: capital gains tax on appreciation above your original purchase price, and §1250 unrecaptured depreciation recapture — taxed at a maximum 25% federal rate — on all the straight-line depreciation you took over the years. For a property held 10 or more years with significant appreciation, the combined tax liability can easily exceed 30% of the sale price before state taxes are added.
Most multifamily investors know about the 1031 exchange as a deferral tool. But the 1031 comes with constraints: you must reinvest in more real estate, follow tight 45-day identification and 180-day closing deadlines, and eventually pay the tax when you finally sell. A structured installment sale under IRC §453 offers a fundamentally different path — one that does not require a replacement purchase and can actually eliminate or reduce tax rather than merely deferring it.
The depreciation recapture trap: A 20-unit apartment complex purchased for $1.5M and depreciated over 27.5 years accumulates $545,455 in total depreciation. On sale, that full amount is subject to §1250 recapture at a 25% federal rate — a $136,364 tax bill before any capital gains tax on appreciation.
Let's break down the tax layers on a typical apartment complex sale:
| Tax Layer | What It Applies To | Rate |
|---|---|---|
| §1250 Unrecaptured Gain | All straight-line depreciation taken | Max 25% federal |
| Long-Term Capital Gain | Appreciation above original purchase price | 0 / 15 / 20% federal |
| NIIT | All gain if MAGI exceeds $200K (single) / $250K (joint) | 3.8% additional |
| State income tax | Varies by state — see state-specific articles | 0% – 13.3% |
Under the installment method, §1250 recapture is recognized first in each payment year, before the lower-rate capital gain. This means you pay the 25% rate on recapture income as each payment comes in, rather than all at once — but you also get the time-value benefit of spreading those recapture payments across years rather than writing a massive check in year one.
| Factor | Structured Installment Sale | 1031 Exchange |
|---|---|---|
| Must buy replacement property? | No | Yes — within 180 days |
| Tax elimination vs. deferral | Can eliminate via bracket management | Defers only — not eliminated |
| Handles §1250 recapture? | Yes — spread across years | Yes — fully deferred |
| Income stream in retirement | Yes — guaranteed annuity payments | No — must manage new property |
| Management burden after sale | None | Ongoing — must manage replacement |
| Buyer cooperation needed? | Yes — assignment at close | No |
| Best when... | You want income, not more real estate | You want to stay invested in RE |
Facts: 20-unit apartment complex in Texas (no state income tax). Original purchase price: $1,500,000 in 2008. Total depreciation taken: $545,455 (27.5-year straight-line). Adjusted basis: $954,545. Sale price: $3,800,000. Total gain: $2,845,455. Of that: $545,455 is §1250 recapture at 25%, and $2,300,000 is long-term capital gain at 20%. NIIT applies (3.8%) to full $2,845,455 gain. Structured sale: 5% interest, 15-year term.
| Scenario | §1250 Recapture Tax | LTCG Tax (20%) | NIIT | Total Federal |
|---|---|---|---|---|
| Lump Sum | $136,364 | $460,000 | $108,127 | $704,491 |
| Structured (15yr) | $136,364 spread over 15yr | $345,000 (15% avg) | ~$0 (under threshold) | $481,364 |
| Tax Savings | $115,000 | $108,127 | ~$223,000 |
Even with no state income tax in Texas, the structured sale saves approximately $223,000 in federal tax — primarily by eliminating the NIIT (since annual installment income stays below the threshold) and by dropping the LTCG rate from 20% to 15% through bracket management. In California, New York, or New Jersey, state tax savings would add an additional $150,000–$250,000 to the benefit.
If your apartment complex carries a mortgage, the buyer typically either assumes the debt or the property is sold subject to it. Under IRC §453, any mortgage assumed by the buyer is treated as boot received in the year of sale — it increases your year-one gain recognition regardless of the installment election. For highly leveraged properties (loan-to-value above 60–70%), this can dramatically reduce the installment-eligible portion of the sale proceeds.
Sellers in this situation should consider: (1) paying down the mortgage before sale, (2) structuring the sale to minimize assumed debt, or (3) consulting with a tax advisor on whether the installment sale still provides net benefit given the boot treatment. The structured installment sale works best when the property is either unencumbered or carries relatively modest debt relative to the sale price.
Yes, but with an important caveat: §1250 unrecaptured gain (the 25% rate on straight-line real estate depreciation) is technically eligible for installment deferral on residential rental property, but it must be reported first in each payment year — before the lower-rate capital gain. §1245 recapture (on any personal property) is not deferrable. For most apartment complex sales, all depreciation taken is §1250 (straight-line on residential real property) and can be spread across installment payments.
A 1031 exchange defers all gain and recapture but requires you to identify replacement property within 45 days and close within 180 days — into another "like-kind" real estate investment. A structured installment sale requires no replacement purchase, converts real estate equity into guaranteed income, and actually saves tax (rather than merely deferring it) through bracket management. The right choice depends on whether you want to stay invested in real estate or convert to income.
IRC §453A imposes an annual interest charge on the deferred tax liability for installment obligations exceeding $5,000,000 outstanding at year-end. The charge is calculated on the deferred tax at the applicable federal rate. For apartment complex sales under $5M in installment principal, no §453A charge applies. Sellers with larger obligations should factor this charge into their net benefit calculation.
Yes, but mortgage debt complicates the calculation. Under the installment method, if the buyer assumes your mortgage (or the property is sold subject to the mortgage), the mortgage balance is treated as boot received in the year of sale — it reduces the installment portion and may accelerate gain recognition. For highly leveraged properties, work with your CPA to structure the transaction to minimize boot.
In a properly structured installment sale backed by a life insurance annuity, the interest rate on your payments is locked in at the time of sale. You are not exposed to fluctuating interest rates after closing. This is a key advantage over holding a seller-financed note: the insurance company absorbs investment risk, and you receive a guaranteed payment regardless of what happens to interest rates or the property.
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