Compare two powerful exit strategies side-by-side. Discover which approach maximizes your wealth based on your goals, timeline, and circumstances.
High-level overview of how these two strategies differ across key dimensions.
| Comparison Factor | 1031 Exchange | Installment Sale |
|---|---|---|
Zero taxes owed at sale $0 | Taxes spread over payment term Pay as you receive | |
Taxes deferred indefinitely Can be $0 at death | Taxes paid over installment term 15-30 years typically | |
Depends on replacement property performance Variable | Predictable monthly income Guaranteed payments | |
Full proceeds work for you 100% reinvested | Limited to payments received Gradual reinvestment | |
Property appreciation + rental income 4-8% annually typical | Interest income from note 5-8% interest typical | |
Timeline pressure and market risk High execution complexity | Buyer default risk Medium credit risk | |
Complex process with strict rules $3,000-$9,000 in costs | Straightforward transaction $3,000-$7,000 in costs | |
Maximum tax benefit for heirs Step-up eliminates taxes | Note passes to heirs Income continues |
Enter your property details to see customized projections for both strategies.
Year 1 Tax Savings with 1031: $139,148
Installment Sale
$4,648,311
1031 Exchange
$6,617,370
Difference
+$1,969,058
Installment Sale (Avg/Year)
$185,228
1031 Exchange (Avg/Year)
$120,000
1031 Exchange Overtakes at
Year 0
Quick break-even. The 1031 exchange strategy overtakes installment sale relatively quickly, making it likely the better long-term choice.
Net Difference
$823,474
Property appreciation exceeds interest income by this amount, favoring the 1031 exchange strategy.
Understanding how tax deferral creates compounding advantages through the time value of money.
Capital Gain
$1,380,000
Taxes Paid (30.9%)
-$426,904
Available to Reinvest
$953,096
Capital Gain
$1,380,000
Taxes Paid
$0 (Deferred)
Available to Reinvest
$1,380,000
Working Capital Advantage: With 1031, you have an extra $426,904 working for you. This is money that would have gone to taxes, but instead continues earning returns.
Future Value of Deferred Taxes
$1,177,841
By deferring $426,904 in taxes and investing it at 7% for 15 years, you gain an additional $750,937 in compound growth.
Formula: $426,903.636 x (1 + 0.07)^15 = $1,177,841
Every Dollar Counts
Every dollar of tax paid today is a dollar not working for you tomorrow. Deferral lets your money compound.
Compounding Power
The 1031 advantage grows with time. Compounding works on the full amount, not just what's left after taxes.
Eventual Tax Due
Taxes are eventually due when you sell—unless you hold until death and heirs get a step-up in basis.
Why immediate cash flow and guaranteed income can be the right choice for many investors.
$12,658
Every month for 15 years
Immediate Down Payment
$500,000
Total Interest Earned
$778,413
Compared to
Bond Yields
Current 10-year Treasury: ~4%
Your installment note: 6%
Compared to
Dividend Stocks
S&P 500 dividend yield: ~2%
Your installment note: 6%
Compared to
Annuities
Typical annuity rate: ~4-5%
Your installment note: 6%
Exit real estate market entirely and diversify into stocks, bonds, or other assets. Reduce concentration risk.
No more tenant calls, maintenance issues, or property management headaches. Just collect payments.
No 45/180 day deadlines to meet. Negotiate terms at your own pace. Less stress and urgency.
Income is contractual and doesn't depend on property market, occupancy, or rent collection.
Installment note is secured by first lien on the property. If buyer defaults, you can foreclose.
Payments continue regardless of property market fluctuations. You're out of the real estate market.
Comprehensive comparison of execution, financial, and ongoing risks for both strategies.
| Risk Factor | 1031 Exchange | Installment Sale |
|---|---|---|
| Timeline Pressure | HIGH 45 days to identify, 180 to close - strict deadlines | LOW Flexible closing timeline, no strict IRS deadlines |
| Deal Falling Through | HIGH If replacement property fails, face immediate tax bill | LOW Single transaction with motivated buyer |
| Documentation Complexity | HIGH Qualified intermediary, multiple forms, strict compliance | MEDIUM Promissory note, deed of trust, annual Form 6252 |
| Professional Costs | MEDIUM $3,000-$9,000 (QI, legal, closing on two properties) | MEDIUM $3,000-$7,000 (legal, closing, optional loan servicing) |
45 days to identify, 180 to close - strict deadlines
Flexible closing timeline, no strict IRS deadlines
If replacement property fails, face immediate tax bill
Single transaction with motivated buyer
Qualified intermediary, multiple forms, strict compliance
Promissory note, deed of trust, annual Form 6252
$3,000-$9,000 (QI, legal, closing on two properties)
$3,000-$7,000 (legal, closing, optional loan servicing)
| Risk Factor | 1031 Exchange | Installment Sale |
|---|---|---|
| Market Risk | HIGH Exposed to property market fluctuations | LOW Exited property market, payments are fixed |
| Liquidity Risk | HIGH All equity locked in illiquid real estate | MEDIUM Down payment liquid, note can be sold (at discount) |
| Default/Credit Risk | LOW No counterparty risk (you own the property) | MEDIUM Buyer may default - mitigated by down payment & lien |
| Reinvestment Risk | LOW Already reinvested in replacement property | MEDIUM Must wisely reinvest monthly payments |
Exposed to property market fluctuations
Exited property market, payments are fixed
All equity locked in illiquid real estate
Down payment liquid, note can be sold (at discount)
No counterparty risk (you own the property)
Buyer may default - mitigated by down payment & lien
Already reinvested in replacement property
Must wisely reinvest monthly payments
| Risk Factor | 1031 Exchange | Installment Sale |
|---|---|---|
| Management Burden | HIGH Landlord responsibilities, tenant management | LOW Only collect payments (or hire servicer) |
| Vacancy/Tenant Risk | HIGH Income depends on occupancy and rent collection | LOW Payments are contractual, not occupancy-dependent |
| Maintenance/CapEx | HIGH Unexpected repairs, capital improvements required | LOW Buyer's responsibility to maintain property |
| Property Tax Increases | MEDIUM Tax increases reduce net cash flow | LOW Buyer pays all property taxes |
Landlord responsibilities, tenant management
Only collect payments (or hire servicer)
Income depends on occupancy and rent collection
Payments are contractual, not occupancy-dependent
Unexpected repairs, capital improvements required
Buyer's responsibility to maintain property
Tax increases reduce net cash flow
Buyer pays all property taxes
Get expert advice on choosing the right exit strategy for your specific situation