Can an installment sale be combined with a like-kind exchange?

What a like-kind exchange is, today

If you trade business or investment real property solely for other business or investment real property of a like kind, you can postpone reporting the gain. The property you receive is treated as a continuation of the property you gave up, and a trade is not a like-kind exchange if the property you trade or receive is held primarily for sale to customers. Under the Tax Cuts and Jobs Act, for exchanges started and completed after 2017, a trade qualifies only if you trade and receive real property; before then, certain exchanges of personal or intangible property qualified. The publication's reminders section says the same: after December 31, 2017, section 1031 applies only to real property held for use in a trade or business or for investment, other than real property held primarily for sale.

If you receive only like-kind property you report no gain. If you also receive money or other property (boot), you report gain to the extent of the money and the fair market value of the other property. Pub. 544 chapter 1 covers like-kind exchanges in detail.

What changes when you also take a note

When the exchange includes an installment obligation, the publication gives three rules to find the installment sale income each year. The contract price is reduced by the fair market value of the like-kind property received. The gross profit is reduced by any gain on the trade that can be postponed. And the like-kind property you receive is not considered payment on the installment obligation. So only the cash payments on the note drive current income, and the like-kind property rolls forward as a continuation of the old property.

The publication's $1,000,000 example

In 2025 you trade real property with an installment sale basis of $400,000 for like-kind property worth $200,000 plus an $800,000 installment note. The note pays $100,000 (plus adequate stated interest) in 2026 and $700,000 in 2027. The selling price is $1,000,000 ($800,000 note plus $200,000 of like-kind property). The gross profit is $600,000 ($1,000,000 minus $400,000). The contract price is $800,000 ($1,000,000 minus $200,000). The percentage is 75% ($600,000 divided by $800,000). You report no gain in 2025, because the like-kind property is not a payment. You report $75,000 of gain in 2026 and $525,000 in 2027. Enter 400,000, 200,000, 800,000, 100,000 and 700,000 above to reproduce each figure.

Deferred exchanges and escrow

In a deferred exchange you transfer property now and receive the like-kind property later, and the person taking your property may have to put funds in an escrow account or trust. The publication says that if certain rules are met, those funds are not considered a payment until you have the right to receive them or, if earlier, the end of the exchange period. It points to Regulations section 1.1031(k)-1(j)(2). Our 1031 exchange deadline calculator tracks the identification and closing dates that govern a deferred exchange.

Why the like-kind property is not a payment

The reason the percentage is built on the reduced contract price is that the property you receive in the exchange is treated as a continuation of the property you gave up. It is not cash coming in, so it cannot trigger gain under the installment method. Only collections on the note do. If you also receive boot in the form of money in the year of the exchange, that cash is reported to the extent of your gain, and the publication's separate discussion of boot applies on top of the note rules. Because the gross profit percentage here (75%) differs from the total gain divided by the selling price (60%), do not use the shortcut of applying 60% to the payments; use the contract price as the publication directs.

Practical limits

The example uses simple numbers; real exchanges often involve debts, exchange costs and boot that change the contract price and gross profit, and the publication's tool above does not model them. Where a mortgage is part of the deal, see the assumed mortgage page. Anything past the single-note case is a job for a tax professional.

Sources

• IRS Publication 537, Installment Sales (2025): Like-Kind Exchange; Installment payments; Deferred exchanges; Exchanges started in and completed after 2017. Read November 2, 2026.

Edition read: Publication 537 (2025), for use in preparing 2025 returns. Dollar thresholds on this page are the figures printed in that edition; check the current publication, Form 6252 and its instructions for your tax year. This page summarizes the publication and does not replace it.