What is best disk image set up when installing Sierra? "An error occurred while preparing the installation"

Your iMac has a split Fusion Drive. If you are attempting to install macOS onto the SSD portion of the Fusion Drive, then that SSD may not be large enough. If you are attempting to install macOS onto the hard drive, then that hard drive may be failing which may be why the Fusion Drive was split

If you do want to get rid of this iMac, then you should first perform a secure erase on the internal hard drive to overwrite all data on the hard drive so that no one can use a data recovery app to try to access your old files. The secure erase is not needed on the SSD since even a simple erase destroys all data on the SSD due to how SSDs work.

Assuming the hard drive is healthy (or healthy enough), then you can recreate the Fusion Drive setup with the instructions in this Apple article:

How to fix a split Fusion Drive - Apple Support

Followed by reinstalling macOS onto the Fusion Drive item.

Try booting into Internet Recovery Mode using Command + Option + R to see if you can access the later online macOS installer since people tend to have more difficulties installer an older version of macOS such as Sierra. Unfortunately some Macs may only boot to the online installer for the older OS which originally shipped with the Mac from the factory.

You can try running the Apple Diagnostics to see if any hardware issues are detected, but it is doubtful the diagnostics will report any problems (even if they do exist), but it never hurts to check.

Start up from macOS Recovery

Option-⌘-R

Upgrade to the latest macOS compatible with your Mac.

In Disk Utility>View, select Show all Devices, highlight the top left entry.

Run Disk First Aid on all items in the left panel, from top down.

APFS won't work for Sierra or earlier, Sierra or earlier needs MacOS Extended Journaled. High Sierra won't work for APFS on earlier Macs.

If all else fails...

https://mrmacintosh.com/how-to-fix-the-recovery-server-could-not-be-contacted-error-high-sierra-recovery-is-still-online-but-broken/

High Sierra “The Recovery Server Could No… - Apple Community

Start up from macOS Recovery

Command-R is generally recommended, especially if you never installed macOS Sierra 10.12.4 or later… How to reinstall macOS - Apple Support

Command (⌘)-R

Install the latest macOS that was installed on your Mac.

Option-⌘-R

Upgrade to the latest macOS compatible with your Mac.

Shift-Option-⌘-R

Install the macOS that came with your Mac, or the closest version still available.

2. Decide whether to erase (format) your disk

If you need to erase your disk before installing macOS, select Disk Utility from the Utilities window, then click Continue. You probably don't need to erase, unless you're selling or giving away your Mac or have an issue that requires you to erase. Learn more about when and how to erase.

3. Install macOS

After starting up from macOS Recovery, follow these steps to install macOS:

1. Choose Reinstall macOS (or Reinstall OS X) from the Utilities window.
2. Click Continue, then follow the onscreen instructions to choose your disk and begin installation.
3. If the installer asks to unlock your disk, enter the password you use to log in to your Mac. If it doesn't see your disk, or it says that it can't install on your computer or volume, you might need to erase your disk. 

1. Please allow installation to complete without putting your Mac to sleep or closing its lid. During installation, your Mac might restart and show a progress bar several times, and the screen might be empty for minutes at a time.

If your Mac restarts to a setup assistant, but you're selling or giving it away, press Command-Q to quit the assistant without completing setup. Then click Shut Down. When the new owner starts up the Mac, they can use their own information to complete setup.

If you never installed macOS Sierra 10.12.4

If macOS Sierra 10.12.4 or later was never installed on your Mac, macOS Recovery works differently:

• Command-R is still the recommended way to start up from macOS Recovery. This combination makes sure that the installation isn't associated with your Apple ID, which is important if you're selling or giving away your Mac.
• Option-Command-R installs the macOS that came with your Mac, or the closest version still available.
• Shift-Option-Command-R isn't available.

How to reinstall macOS - Apple Support 

Of course you may need to make a USB installer...

Create a bootable installer for macOS - Apple Support...

Create a bootable installer for macOS - Apple Support

Check the Format in Disk Utility, Sierra won't work if APFS, High Sierra won't even work for oldr Macs, they needHFS+, called MacOS extended Journaled...