Real estate and business owners seek ways to save on taxes when they sell their property or business. 
Structured Installment Sales may be the solution virtually nobody has considered.

Structured Installment Sales can make property or business sales much more attractive and tax-efficient

For many owners of appreciated real estate or privately held businesses, the biggest obstacle to selling is not finding a buyer, it’s the tax bill. Between federal capital gains taxes, state taxes, and the Net Investment Income Tax (NIIT), sellers can pay as much as 37.1% in taxes on the gain of their asset. Very often that tax hit makes selling an unappealing proposition. Very often that tax hit makes selling an unappealing proposition. 

We consulted one of our resources, John Dudek, a legal settlement consultant and life insurance agent with Sage Settlement Consulting. John specializes in Structured Installment Sales, a little-known strategy that can mitigate the financial pain associated with the taxes on property and business sales. He is one of only a few financial professionals in the country who is experienced in facilitating these transactions.

While the strategy has existed under IRC Section 453 installment sale rules for decades, it has recently gained increased attention from financial publications and tax professionals looking for alternatives to traditional lump-sum sales.

What is a Structured Installment Sale?

At its core, a Structured Installment Sale is very similar to a traditional IRC 453 Installment Sale.

The difference stems from the SIS using a third-party assignment company and an annuity issued by a life insurance carrier.

A Structured Installment Sale allows sellers to spread taxable gains over several years instead of recognizing the entire gain in the year of sale. The seller can convert a portion of the proceeds into a predictable stream of future payments backed by a highly rated life insurance company.

Instead of receiving all sale proceeds at closing, the seller elects to receive part or all of the proceeds over a number of years according to a customized payment schedule. Utilizing the installment method of accounting, long-term capital gains taxes are recognized in the year payments are received, instead of all at once. This allows the seller to dictate when to recognize their gain and create a plan with their tax advisor that fits their specific needs.

The future payments are fully customizable, and can be received monthly, quarterly, or annually. The seller can also elect to take their first payment many years after the actual sale.

Unlike a traditional seller-carryback note, the payment obligation is assigned to a specialized assignment company funded through an annuity from a highly rated insurance carrier. This can help eliminate the credit risk associated with relying directly on the buyer for future payments.

Eligible assets: more flexible than many people realize

One of the most attractive features of a Structured Installment Sale is its flexibility.

The strategy works for many types of assets, including:

• Primary residences
• Rental properties
• Commercial real estate
• Apartment buildings
• Agricultural land
• Privately owned businesses
• Professional practices
• Other highly appreciated assets (artwork, classic cars, jewelry, etc.)

Specifically in real estate transactions, the SIS differs from a 1031 exchange because the seller does not need to purchase replacement property. The transaction is an actual sale, allowing the seller to diversify away from concentrated real estate holdings while still deferring and potentially lowering taxes.

For many sellers, this creates a middle ground between paying all taxes immediately in a cash sale and remaining indefinitely invested in replacement real estate through repeated 1031 exchanges.

How the tax deferral works

Under IRC Section 453 installment sale treatment, gain is generally recognized proportionally as payments are received over time.

In a traditional cash sale, a seller may owe taxes on the entire gain in one tax year. With a Structured Installment Sale, the seller can spread recognition of gain over many years which defers and potentially significantly lowers long-term capital gains taxes. It also allows the seller to keep otherwise taxable dollars invested and compounding longer.

For retirees or business owners transitioning into retirement, this can create substantial planning opportunities by coordinating income with:

• Social Security timing
• Required Minimum Distributions (RMDs)
• Medicare premium thresholds
• Charitable planning
• Estate planning objectives

The role of insurance companies

A key component of many Structured Installment Sales is the use of annuity contracts issued by major life insurance companies.

The insurance carrier’s annuity is designed to fund the future payment obligation owed to the seller. Many sellers prefer the financial security of being paid by an A+ rated life insurance carrier as opposed to an average buyer.

This structure may appeal to sellers who:

• Prefer predictable income
• Want to reduce market volatility exposure
• Value principal stability
• Are looking for retirement-oriented cash flow planning

Important planning considerations

Structured Installment Sales are an under-utilized tool to defer and lower capital gains, but they are not a one-size-fits-all solution.

Certain assets are not eligible under installment sale rules, and the structure must be established before closing. For these reasons, sellers should work closely with their qualified tax advisors, legal counsel, real estate or business brokers, and financial professionals familiar with IRC 453 transactions.

Like any advanced planning strategy, proper structuring and documentation are critical.

Final thoughts

For sellers facing large capital gains exposure, a Structured Installment Sale may offer a compelling alternative to a traditional lump-sum sale.

The strategy can potentially:

• Defer capital gains taxes
• Provide predictable long-term income
• Utilize highly rated insurance carriers
• Eliminate buyer credit risk concerns common in seller financing
• Create greater flexibility for retirement and estate planning

Despite these advantages, many business owners, real estate investors, and even financial professionals remain unfamiliar with the concept.

In an environment where capital gains taxes continue to be a major planning concern, Structured Installment Sales represent one of the most underutilized tax-efficient sale strategies available today. For more information and to request Structured Installment Sale quotes, contact John Dudek at (401) 524-4022 or jdudek@sagesettlements.com. Contact us to learn how a Structured Installment Sale can fit into your comprehensive financial plan

Sound management for your secure future

Pacific Wealth Management is a fee-based, fiduciary firm offering comprehensive financial planning and investment advisory services.

Our disciplined planning process includes:

• Goals-Based Needs Analysis
• Capital Gains and Sale-Transaction Planning
• Tax Planning Coordination
• Investment Portfolio Management
• Retirement Distribution Strategies
• Social Security and Long-Term Projections