Monetized installment sale: how it is marketed, and why the IRS says it fails

How it works (as marketed)

The Federal Register describes the typical transaction this way (88 FR 51756):

1. The seller, who already has a buyer at a set price, sells the property to an intermediary, often tied to the promoter, for an installment note that pays interest only, with principal due in a balloon after many years.
2. The intermediary immediately resells the property to the real buyer for cash, at about the same price.
3. The intermediary deposits the buyer's cash, less fees, into an account with a third-party lender.
4. The lender makes a nonrecourse loan to the seller of about the same amount, funded or secured by that account. The seller's loan payments are limited to what the intermediary pays on the note.
5. When the note matures, the note, loan and account offset, and the seller reports the gain then.

The pitch: the seller has nearly all the cash on day one and pays tax in 30 years.

IRS stance and audit risk

The IRS has taken the position, repeatedly and in writing, that the structure does not defer gain:

• Chief Counsel Advice 202118016, released May 7, 2021, agreed that "the theory on which promoters base the arrangements is flawed" and listed problems: no genuine debt, debt secured by the escrow, the economic benefit doctrine, the Section 453A(d) pledge rule and the step transaction doctrine (CCA 202118016).
• Dirty Dozen. The IRS put monetized installment sales on its 2023 Dirty Dozen list of schemes (IR-2023-65).
• Proposed listed transaction. On August 4, 2023 Treasury and the IRS proposed Prop. Treas. Reg. 1.6011-13 (REG-109348-22) to identify monetized installment sales and substantially similar transactions as listed transactions. The preamble says the intermediary is not a bona fide buyer, citing Court Holding, and that the seller has received full payment, either because the note is indirectly secured by the sale cash (Temp. Treas. Reg. 15a.453-1(b)(3)(i)) or because the loan proceeds are themselves a payment.
• Status. As of October 2026 the Federal Register shows only the proposed rule and an October 11, 2023 notice cancelling the public hearing; no final rule. A federal district court in Idaho dismissed a promoter's challenge to the proposal, holding that a proposed rule is not final agency action. Listed status starts when final regulations are published, and the proposal would then require disclosure for prior years still open for assessment.

Even before a final rule, the government challenges these deals on the merits. In April 2025 the Justice Department asked a federal court in Idaho to bar a promoter from selling them, alleging about 386 transactions with reported sales over $968 million since 2015, according to published reports of the complaint.

Penalties if it is recast

• The tax itself. The full gain is taxed in the year of the sale, with interest from the original due date.
• Accuracy penalty. 20% of a reportable transaction understatement, 30% if the transaction was not properly disclosed (IRC 6662A).
• Failure to disclose a listed transaction (once listed): 75% of the tax decrease, at least $5,000 and at most $100,000 for an individual for each failure (IRC 6707A). Material advisors have their own disclosure and list-keeping duties.
• Longer exposure. Undisclosed listed transactions can keep the assessment period open (IRC 6501(c)(10)).

Worked example

Assumptions (illustrative): married couple filing jointly, $150,000 of other income, 2026 tables, a $5,000,000 long-term gain. Taxes from the sale computed with the Big Sale Tax engine.

If the transaction is recast, the first row is due for the sale year, plus interest and the penalties above, and the seller has already spent the fees and taken on a loan.

Who it fits, and who it does not

It fits no one Hans works with. A seller who wants cash at closing and lower tax is better served by a model of the lawful options: a cash sale with planning around timing and losses, a 1031 exchange, an Opportunity Zone investment, a charitable remainder trust, or a real installment sale where the seller accepts receiving the money over time.

Costs and fees

Sellers pay fees to the intermediary and the lender, often bear a spread between the loan rate and the note rate, and pay legal costs. The Federal Register preamble notes that the fees are "substantially less than the Federal tax savings purportedly achieved," which is why the transaction is sold. If the deferral fails, the fees are gone and the tax is still due.

How it compares with a Section 453 installment sale

The difference is economic: in a real installment sale you wait for your money and carry the buyer's credit, which you manage with a down payment, a first-position lien, a personal guarantee from the buyer's owners and strong note terms. The deferral is the reward for actually deferring the cash. See installment sale, seller financing and the Section 453A pledge rule, which treats borrowing against a note as payment.

Frequently asked questions