Structured Installment Sales: A Tax-Efficient Exit Plan for Investors

Written By
Carl E. Sera, CMT
Published On
July 25, 2023

Deferred Sales TrustYou're probably here because you're curious about what a "structured installment sale" is and how it can be useful in your specific scenario. While this concept may be unfamiliar to you, this secured method of selling your real estate, business, or other qualified real property is one of the least known and least understood financial tools in today's tax and investment community.

Keep reading to learn more about the Structured Installment Sales tax deferral strategy and how it can be of help.

What Is A Structured Installment Sale?

Structured installment sales arose from Internal Revenue Code (IRC) section 453, which oversees the sale of eligible appreciated assets utilizing the installment method, in which sellers can spread out recognition of capital gains and, therefore, the capital gains tax over a stated number of years according to an agreed-upon schedule rather than receiving a lump sum.

Over the years, the Structured Sale has been a beneficial instrument for assisting in the sale of real estate in instances where 1031 exchanges are inconvenient. Structured Sales serve to reduce the amount of equity liable to current tax on business or property sales that qualify for installment treatment (under IRC 453).

A structured installment sale allows sellers to defer the recognition of gains on the sale of a business or real estate. These gains, including federal, state, and Affordable Care Act tax responsibilities, can be delayed to the tax year in which the seller actually receives the sale proceeds.

The Process of Structure Installment Sales

In order for structured installment sales to be successful, the property or asset must first qualify for installment sale tax treatment as stated in IRS Publication 537, because not all transactions will be qualified. The sale of goods, stock, or securities; depreciation recapture; and other specifically stated exclusions listed in Publication 537 are among the transactions unsuitable for installment sale tax treatment.

Furthermore, both buyer and seller will typically be required to execute an acknowledgment statement and other disclosures as required by the provider of the structured installment sale product prior to any deal moving forward, to ensure compliance with the issuer's acceptance requirements.

Parties will next formalize their intent to enter into an installment agreement, typically via an addendum to the sales contract, the provisions of which will also be incorporated into the accompanying nonqualified assignment, which serves as the official instrument required to complete the transaction. Much of this, including direct funding of the annuity contract, can be accomplished as an extension of the normal closing process at the close of escrow.

The non qualified assignment company paperwork is an essential component of the structured installment sales transaction. Because one of the keys to tax deferral is the ability to avoid constructive receipt of income in the year of sale lest the seller be taxed on the entire gain all at once, this document outlines the amounts that will be paid in the future.

And, because the present value of these future periodic payments is funded by the portion of the sales proceeds that is deferred, the seller can avoid recognizing the taxable income until it is actually received in the future. To the buyer, however, everything is the same as it would be in a cash deal.

All of the above must be coordinated by a licensed, experienced, and specially appointed structured installment sales expert who will ensure that the desired payout schedule is properly implemented and will oversee compliance with all necessary paperwork to complete the structured installment sale.

Installment Sale Examples

Sean receives an offer of $400,000 for his rental home. He bought the property for $300,000. Over the years, he has taken $100,000 in depreciation deductions, making his adjusted basis $200,000. Therefore, Sean has $200,000 ($400,000 – $200,000) of taxable gains to declare.

Sean’s advisor recommends he break down his sale proceeds into eight annual installments of $50,000 each instead of declaring $400,000 in one year. As long as the installments are constructively received each year, this method will allow Sean to record the profits, and, therefore, a prorated portion of the gains, over the eight years.

Final Thoughts

Structured installment sales are a possible way to mitigate the taxes paid in selling highly appreciated personal, business, or investment property. It can also be utilized when selling a traditional business not related to real estate. Before you go ahead with such a sale, please consult with qualified professionals to decide whether this vehicle is right for you.

Thinking of exploring Structured Installment Sales as a 1031 exchange alternative? Then make a no-obligation appointment with us today.

Carl E. Sera, CMT

Carl E. Sera, CMT

Managing Principal, Sera Capital
Carl Sera is a Chartered Market Technician and the Managing Principal at Sera Capital Management, LLC. He has over 16 years of experience in the financial services industry with a focus on investment management.

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