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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 Sale requires only minimal cooperation from the Buyer at the time of sale.  In an installment sale, the Seller must rely on the Buyer's financial ability to make the future payments, while in a Structured Sale payments are guaranteed by a major life insurance company.  The Structured Sale also allows the Seller to customize the payment stream to maximize their benefits while receiving a pre-tax guarantee rate of return on principal.

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

 

  • Personal residence is sold for a large gain - A personal residence is not eligible for tax defferal treatment under IRC Code 1031.  If a home purchased for $500,00 exclusive under IRC Code 121 the owners are left with a $1,000,000 taxable gain.  Instead of incurring a large capital gains tax they elect to defer the tax and set up a guaranteed stream of income by structuring the balance.  This option has become increasingly important in light of recent legislation that will restrict the availability of the full 121 exculsive in certain situation.
  • Sale of Income property -  Sometimes an owner who has deferred taxes over the years by using IRC Code 1031 tax-deferred exchanges, wants to get out of the landlord business.  By using a Structured Sale, the owner can set up a payment stream to mirror the former rental income, all the while deferring capital gains.
  • Vacation homes -   Over the years many taxpayers have used IRC Code 1031 tax-deferred exchanges to acquire or dispose of resort area rental properties.  Without a "bright line" test to determine how much personal use is allowed without losing the investment nature of the property, this has been somewhat of a grey area.  Recently issued, Rev. Proc. 2008-16 now provides a safe harbor regarding the amount of personal use.  As a result, some sellers may be more inclined to structure the sale of such properties rather than exchanging them.
  •  Goodwill - In the sale of an ongoing business, a portion of the sales price is usually allocated to the goodwill of the business.  However, the goodwill of one business is never "like-kind" to the goodwill of another for purposes of a tax-deferred exchange.  Taxes on the portion of gain allocated to goodwill can be deferred through a Structured Sale.
  • Personal propertyJust as the benefits of a tax-deferred exchange are not limited to real estate, a Structured Sale can be used for virtually any capital asset.  Aircraft, collectibles, office equipment, and furniture are just a few examples of non real estate assets that can be used in a Structured Sale.
  • Alternative Minimum TaxThe Alternative Minimun Tax (AMT) often operates as a "hidden" tax.  The receipt of a large amount of gain can push a taxpaper into a situation where their AMT exemption is lower or wiped out.  Also, the higher state tax payments caused by the sale are not deductible for purposes of calculating the AMT.  A Structured Sale can be used to alleviate the impact of the AMT.

 
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 taxpaper 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 the 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 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 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 Sales enable investors to maximize the value of their portfolio by harnessing the power of tax-defferal.  During these times of economic uncertainty, the legal protections and guarantees wrapped around Structured 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