For real estate investors, the decision to sell is rarely just about price. Timing, tax exposure, and what to do with the proceeds all factor in, and the right tax strategy can be the difference between a transaction that funds the next investment or one that hands a meaningful share of the gain to the IRS.
Three gain deferral strategies stand out for real estate investors evaluating a sale: installment sales, like-kind exchanges, and opportunity zone funds. Each works differently, fits different situations, and carries its own timing rules and tradeoffs. For apartment owners, where long holding periods and accumulated depreciation can make the tax impact of a sale especially significant, these strategies can defer, reduce, or (in limited cases) eliminate the tax owed on a gain, freeing up more capital to redeploy.
This article focuses on real estate held for investment, not property held as inventory by dealers in the ordinary course of business. The strategies, mechanics, and tradeoffs that follow assume an investor profile.
Installment Sales
An installment sale spreads the recognition of gain across multiple tax years, with gain recognized proportionate to when sale proceeds are actually received. It’s the simplest of the three deferral strategies and works best when a seller is willing to act as the lender on part of the purchase price.
Two conditions need to be met:
- The sale must result in a gain, and
- At least one payment must be received after the close of the tax year of sale.
Installment treatment also isn’t available for loss transactions (a loss must be recognized in full in the year of sale) or for dealer dispositions of property held as inventory. Once those conditions are in place, gain is recognized as cash comes in, which aligns the tax bill more closely with cash flow. Spreading gain across years can also keep the seller out of a higher tax bracket in the year of sale; a meaningful benefit when a single transaction would otherwise spike adjusted gross income.
What to watch for:
- Each cash payment generally has an interest component. If interest isn’t stated or is below the applicable federal rate, part of the payment may be recharacterized as interest and taxed as ordinary interest income.
- Depreciation recapture works differently depending on the type. The portion taxed as ordinary income—typically from personal property components broken out in a cost segregation study—must be recognized in full in the year of sale and can’t be deferred under the installment method. The portion taxed as capital gain at the 25% rate—typically from depreciation on the building itself—can be reported under the installment method but is also front-loaded and would not exceed the installment gain recognized for each year. For long-held apartment buildings, especially those with cost segregation studies that accelerated depreciation on personal property, the ordinary income piece can produce a meaningful tax bill in year one (before most of the cash has come in).
- An interest charge on the deferred tax may apply for large installment obligations. The charge applies when a taxpayer’s aggregate outstanding installment obligations from sales over $150,000 exceed $5 million at year-end. Below that threshold, no interest charge applies.
- Sales between related parties carry additional limitations and special rules. If the related buyer disposes of the property within two years, the deferred gain generally becomes taxable at that time. Installment reporting for sales of depreciable property to certain related parties is severely limited.
- Unlike a 1031 exchange, an installment note doesn’t disappear at death. The deferred gain is treated as income in respect of a decedent and remains taxable to the estate or heirs, no step-up in basis on the deferred portion.
The best fit:
Installment sales tend to make sense when the seller is willing to finance part of the deal, when smoothing the tax hit across years has real value, and when the depreciation recapture exposure is manageable upfront.
They can also be paired with other strategies. For example, electing out of installment treatment for a particular year, or using installment proceeds to fund a Qualified Opportunity Fund (QOF) investment. It’s recommended to work through the structure with a qualified tax advisor before the deal closes for a clean deferral.
Like-Kind Exchanges
A like-kind exchange (also commonly called a 1031 exchange, after its tax code) defers the gain on the sale of eligible real property by rolling it into a replacement investment property. Both the relinquished property and the replacement property must be held for business or investment use. When the exchange is structured correctly, no gain is recognized on the original sold property until the replacement property is eventually sold. This is the most established of the three strategies and the one most real estate investors know by name.
Strict timelines govern both the identification of replacement property and the length of the overall exchange period—and the documentation requirements are extensive.
A 1031 exchange also requires a qualified intermediary (QI) or an independent party who holds the sale proceeds, so the seller never takes constructive receipt of the cash. The QI cannot be related to the taxpayer or acting as the taxpayer’s agent (e.g., an employee, attorney, or broker). Multiple properties can sit at either end of the transaction; a single property can be exchanged into several properties, several properties can be consolidated into one, or any combination in between. For apartment investors, this flexibility is part of why 1031s are so widely used: they allow consolidation of smaller assets into a larger property, or the reverse for estate or operational reasons.
Debt is where 1031s most often go sideways. Relief from liabilities on the relinquished property is treated as money received, while liabilities taken on for the replacement property are considered money given. Because of this, it’s important to consider the debt on the old property compared to the debt on the new property. If the debt of the new property is less than the debt on the relinquished property, the difference can become taxable—though investors can offset a debt shortfall by adding cash into the replacement property purchase, effectively trading additional equity for the lower debt. It’s also possible to trigger partial gain recognition while still deferring the remainder. Investors who aren’t aware that they’ve triggered a gain, and who have already redeployed the proceeds into the new property, can find themselves with a tax bill and no liquidity to cover it.
What to watch for:
- Strict timelines apply: 45 days to identify replacement property and 180 days to close. Missing either window collapses the deferral.
- The QI must be in place before closing on the relinquished property. After-the-fact arrangements don’t qualify, and constructive receipt of proceeds will trigger gain. Aprio can help connect investors to a qualified intermediary if needed.
- Debt mismatches between the relinquished and replacement properties can create taxable boot if not offset with additional cash invested in the replacement property, even when the rest of the exchange is clean.
- Depreciation recapture is generally deferred along with the gain in a properly structured 1031, which is a meaningful advantage over installment sales, particularly for long-held apartment assets with significant accumulated depreciation.
- The recapture deferral isn’t automatic. However, boot received, or a mismatch in property types between the relinquished and replacement properties, can trigger partial recapture in the year of the exchange. For cost-segregated apartment buildings, this is worth paying careful attention to during deal structuring.
- Documentation requirements are extensive. Working with a tax advisor before and during the deal can be the difference between a deferral that holds up and one that doesn’t.
The best fit:
When an investor is eventually ready to sell the replacement property, the deferred gain becomes due. But there are options: the investor can roll into another 1031 for continued deferral, pair the sale with a different deferral strategy (e.g., a QOF investment), or hold the property until death.
If the property is held by an individual at death, the heirs generally receive a step-up in basis to fair market value, which can resolve the deferred gain entirely (assuming the property has appreciated). If the property is held through a partnership, the deceased partner’s interest in the partnership generally receives a step-up in basis at death. A separate adjustment to the partnership’s basis in the real estate itself may also be available, but only if the partnership has the appropriate election in place. Without it, the successor partner may not get the full benefit of the step-up on a future sale or may forfeit additional depreciation deduction benefits from stepped-up depreciable basis. This is worth discussing with a tax advisor well before death, since the election has to be in place at the right time to work.
This combination of indefinite deferral and potential basis step-up is what makes 1031 a powerful long-term planning tool and why it tends to be the strategy of choice for investors building generational real estate portfolios.
Like-kind exchanges fit best when an investor wants to stay invested in real estate, has identified a viable replacement property within the timeline, and is comfortable with the structural rigor the strategy demands. The complexity is there, but for investors with the right goals and a coordinated team, the deferral and estate planning benefits are hard to match.
Opportunity Zone Funds
Opportunity zones (OZ) are the newest of the three strategies and the only one that can do more than defer gain; it can also reduce or, in part, eliminate it. Originally created in 2017 and permanently extended and refreshed by the One Big Beautiful Bill Act (OBBB) in 2025, the program lets investors roll capital gains into a Qualified Opportunity Fund (QOF) in exchange for three potential benefits:
- Deferral of the original gain
- A partial permanent exclusion from that gain after a five-year hold
- Tax-free appreciation on the QOF investment itself, if held long enough
The mechanics turn on timing at three points: when the original gain event takes place, when the QOF investment is made, and how long the investment is held. Under the refreshed rules, the original gain can be deferred for five years. Holding the QOF investment for that full five-year period unlocks a partial permanent exclusion of the originally deferred gain, either 10% or 30%, depending on the type of OZ investment. After the OZ investment is held for 10 years, appreciation on the QOF investment itself is excluded from tax for up to 30 years.
What to watch for:
- The five-year mark creates a “phantom income” event. When the deferral period ends, the original deferred gain (less the partial exclusion) becomes taxable, whether or not the QOF investment has generated any cash to pay the bill. Working with a tax advisor well before that point is essential to plan for the liability and avoid surprises.
- Strict timing rules govern when the original gain must be invested into the QOF after the gain event. Missing the window forfeits the deferral entirely.
- OZ investments are generally illiquid and longer-horizon by design. The 10-year holding period required to access the tax-free appreciation benefit is a meaningful commitment.
- State conformity varies. Several states do not fully follow federal OZ rules, which can create state-level tax exposure even when the federal treatment is clean. It’s worth confirming any state where the investor files.
The best fit:
Opportunity zone funds fit best for investors who have a significant capital gain to redeploy, a long investment horizon, and tolerance for the illiquidity and complexity that come with QOF structures.
They also pair well with other strategies. For example, capital gains from an installment sale can be invested into a QOF in the year the gain is recognized, combining the cash flow benefits of installment treatment with the deferral and exclusion benefits of an OZ investment. Given the timing rules, the illiquidity, and the phantom income event, OZ strategies reward early planning with a tax advisor more than most.
For a deeper look at how opportunity zone funds work under the refreshed OBBB rules, see our earlier article on the topic.
Final Thoughts
Each of these strategies can stand on their own or in combination with each other based on the specific facts of the situation and goals of the investor.
Here are a few examples of how investors stack them in practice:
- Installment sale into a QOF. Capital gains recognized from installment payments can be invested into a QOF in the year each payment is received, layering the cash flow smoothing of an installment sale with the deferral and partial exclusion benefits of an OZ investment.
- 1031 exchange followed by an eventual installment sale. An investor who has deferred gain through one or more 1031 exchanges over many years can, when finally ready to exit, structure the sale of the replacement property as an installment sale, thereby spreading the now-substantial deferred gain across multiple tax years rather than recognizing it all at once.
- Partial 1031 with the boot reinvested in a QOF. When a 1031 exchange triggers partial gain (e.g., due to a debt mismatch or cash boot), the recognized capital gain can be rolled into a QOF in the same year, deferring the portion that would otherwise be taxable immediately.
Which combination fits depends on the investor’s goals, the size and character of the gain, the timing of the sale, and what comes next. The common thread across all three strategies is that they reward planning before the gain event, not after. Once a sale closes, the menu of options narrows quickly; qualified intermediaries can’t be added retroactively to a 1031, OZ investment windows start running on day one, and installment terms must be in the sale agreement itself.
For apartment owners and other real estate investors weighing a sale, the right move is rarely picking a strategy in isolation, but rather mapping the goals first (i.e., cash flow, reinvestment plans, estate considerations, state tax exposure), then building the structure that fits.
If you’re considering a sale and want to think through which deferral strategies could work for your situation, Aprio’s Real Estate team is ready to help.