By Kristy Caron, Nicholas Lyskin, and Adon Solomon
An installment sale occurs when property is disposed of and at least one payment is received after the tax year of the disposition. See I.R.C. § 453. Under a standard installment sale, the buyer makes scheduled payments to the seller over time, and the seller recognizes capital gains accordingly. Monetized installment sales are a variation on installment sales, whereby the seller attempts to gain near-immediate access to all of the sale proceeds while still aiming to defer capital gains tax over time.
Enforcement efforts are intensifying with respect to monetized installment sales. The Internal Revenue Service (IRS) added monetized installment sales to its Dirty Dozen list in 2021. In 2023, the IRS proposed labeling certain monetized installment sales and substantially similar transactions as listed transactions. See Prop. Reg. Section 1.6011-13. The listed transaction designation aids the IRS in tracking potentially abusive transactions by requiring specific disclosures, including Form 8886 (Reportable Transaction Disclosure Statement).
In April 2025, the United States Department of Justice (DOJ) filed a complaint in the Idaho District Court against a former tax and real estate attorney and his company (collectively, “defendants”), alleging that defendants organized, promoted, and sold a plan to their customers that unlawfully defers capital gains tax due from sales of appreciated assets, including real estate and business interests. The DOJ claims that defendants sold approximately 386 monetized installment sale transactions nationwide, reporting total sales of over $968 million since 2015. The DOJ ultimately seeks a permanent injunction barring defendants from promoting monetized installment sale transactions.
The structure of monetized installment sales can vary. The DOJ alleges that under defendants’ plan, a seller that owns property searches for a buyer and the buyer agrees to pay the full sales price in the year of the sale. The seller separately agrees to sell the same property to an intermediary, who promises—pursuant to an installment agreement—to pay the seller for the property in a lump sum in a certain number of years with interest due annually. Meanwhile, the intermediary resells the property at the negotiated price to the buyer who pays the purchase price, without the intermediary ever acquiring the property. Legal title to the property is transferred directly from seller to buyer. Lastly, the intermediary arranges for the seller to enter into a loan agreement with a lender for a term similar to the installment agreement and with only interest due until the loan is payable. According to the DOJ, the substance of defendants’ plan is to provide sellers with sale proceeds in the year of the sale while allowing defendants to defer payment of taxes on the taxable gains from the sales for years.
If you have structured or participated in an installment sale, monetized or not, you may be under an increased audit risk. What should you do?
- Review your structure. Was it properly documented? Is there legitimate economic substance?
- Consult a tax advisor experienced in IRS controversy and transaction structuring.
- Disclose where appropriate.
It will be interesting to observe whether legitimate installment sale transactions can avoid getting caught up in expensive tax examinations. One size fits all enforcement is rarely effective, but is often the method used with respect to listed transactions.