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Structured Installment Sales

Harnessing The Power of Tax Deferral

A Structured Sale is an improved version of the traditional installment sale.  It combines the security of a cash sale with the tax benefits of an installment sale.  Unlike a traditional installment sale, the Structured Installment Sale requires only minimal cooperation from the Buyer at the time of sale.  In a traditional installment sale, the Seller must rely on the Buyer's financial ability to make the future payments, while in a Structured Installment Sale payments are guaranteed by a major Fortune 50 life insurance company.  The Structured Installment Sale also allows the Seller to customize the payment stream to maximize their benefits while receiving a pre-tax guaranteed rate of return on principal.

A Structured Sale can be used in many situations, for example: 

 

  In the next few years, the U.S. will see the largest and most affluent generation in history move from their income phase to their retirement phase.

 Baby Boomers will continue to exit their highly appreciated real estate and businesses and transfer those assets into other financial vehicles that will best help them to live the lifestyle they want to live during retirement.

As we know no one strategy will fit the needs of ALL sellers...

Do you have clients who would benefit from exchanging real estate, business interests, professional practices, or personal property for a guaranteed tax-deferred income stream?

An Installment Sale is defined in Sec.453 of the Internal Revenue Code of 1986 as "a disposition of property where at least 1 payment is to be received after the close of the taxable year in which the disposition occurs".

  • In general, Installment Sales permit sellers to defer gains on certain property dispositions to the tax year in which the related sale proceeds are received.

The Structured Installment Sale is a method of selling appreciated assets whereby you defer Capital Gains Tax under the Installment Sale method of reporting (IRC453).

You can design a Structured Installment Sale without the usual concerns regarding the credit worthiness of the buyer for future payments. The periodic payments will be funded with an annuity from a large highly rated Fortune 50 Insurance Company.

A Structured Installment Sale can provide powerful benefits to buyer and seller and broker

                                            The Benefits

 

  •  Deferral of taxable gains providing potential tax savings
  •  Possible future offsets of capital gain/capital loss
  •  Asset Protection feature
  •  Guaranteed income stream designed by and for the individual
  •  Consistent, stable, and predictable income stream
  •  Guaranteed rate of return for a specific number or years possibly including heirs
  •  No ongoing costs/expenses
  • Ease of implementation
  • Guranteed by a Fortune 50 Insurance Company
  • No added complexity to the closing
  • Triple compounding effect of the sale proceeds
  • Effective for 1031 Exchangers when the Exchange has failed to close
  • Potential to bring ask/offer together to close transaction

 Each installment payment consists of three components:

 

  •  Deferred return of basis
  •  Deferred capital gain
  •  Ordinary income earned on the money in the annuity

 

 The 1031 Fall-back is a tax strategy that allows the Exchanger to receive Capital Gains Deferral in the event that their 1031 fails.  This is accomplished by implementing a Structured Installment Sale in conjunction with the 1031 Exchange.

As a precaution, every 1031 Exchange Sales Contract should include Structured Installment Sale language as a Fall-back plan for your clients' protection.

The Structured Installment Sale is a method of selling appreciated assets whereby you defer Capital Gains Tax under the Installment Sale method of reporting (IRC453).

Many people feel that a Structured Sale may also be used to rescue a failed IRC Code 1031 exchange.  If a taxpayer fails to identify replacement property by day 45, the exchange fails, and the entire proceeds are immediately taxable.  Similarly, if a taxpayer identifies but does not acquire property, or acquires some property but does not use up all of the exchange proceeds, the remaining funds are taxable boot.  This Exchange Fall Back Option may allow the taxpayer to salvage some favorable tax treatment by taking the proceeds in installments, and thus being taxed only as payments are received pursuant to IRC Code 453.

The availability of the1031 Exchange Fall Back Option should give comfort to a seller who may be unsure about entering a tax-deferred exchange.  Even if they are unable to acquire suitable replacement property, they may still achieve tax deferral by structuring the exchange proceeds.

There are a few situations where a Structured Installment Sale probably won't help a seller: (i) the sale of inventory, (ii) most of the gain is depreciation recapture under IRC Code 1245, (iii) the property is highly leveraged, or (iv) there is an immediate need for cash.  It is important to remember that, like a tax-deferred exchange, a Structured Installment Sale is not an all or nothing proposition.  Even if part of your transaction may not be a good fit, you may still be able to structure a portion of the deal.  

Structured Installment Sales enable investors to maximize the value of their portfolio by harnessing the power of tax-deferral.  During these times of economic uncertainty, the legal protections and guarantees wrapped around Structured Installment Sales make them a perfect alternative for prudent investors.

 Non-Qualified Structured Sale Diagram

Structured Sale and 1031 Fall Back

IRS Forms and Additional Tax Information

 

 

Non-Qualified Structured Sale Diagram

Structured Sale and 1031 Fall Back

IRS Forms and Additional Tax Information