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STRUCTURED SALES

A “structured sale” is a special type of installment sale under Internal Revenue Code 453. Installment sales permit sellers to defer gains on the sale of a business or real estate to the tax year in which the related sale proceeds are received. Structured sales defer recognition of the gain until a more advantageous time and allow the seller to rely on the credit of a highly rated life insurance company rather than that of the buyer. Currently, the minimum amount which can be structured is $100,000 (per Allstate Life Insurance Company)

In a structured sale, rather than the buyer paying the installments, the buyer pays cash, some of which is assigned for the purchase of an annuity from a life insurance company rated A+ by A.M. Best. The sale documents specify for substitution of the obligor (the entity making the payments). Tax precedents regarding substitution of obligors include Rev. Rul. 82-122 amplifying 75-457 and Wynne v. Commissioner 47 B.T.A. 731 and Cunningham v. Commissioner 44 T.C. 103.

The seller chooses on what dates payments will be received. Sellers can arrange for income to last their whole life with a guarantee period, or for a defined term with payments by the month, quarter, half-year or year. Payments can come in one or more lump sums. Any of these options can be combined.

The seller only recognizes capital gain and accrued interest upon receipt of each structured sale payment. Taxation is the same as if the buyer were making installment payments directly.

Structured sales are an alternative to a section 1031 exchange, which defers recognition of capital gain, but forces the seller to continue holding some form of property. Structured sales work well for sellers who want to create a continuing stream of income without management worries. Retiring business owners and downsizing homeowners are examples of sellers who can benefit. The structured sale must be documented in the transaction documents in such a way that the ultimate recipient does not constructively receive the payment until it is actually paid. For the buyer, there is no difference from a traditional cash-and-title-now deal. However, because of tax advantages to the seller, structuring the sale might make an offer more acceptable. Because the buyer has paid in full, the buyer gets full title at time of closing.

There is no cost to either seller or buyer because the life insurance company’s marketing and other administrative expenses are reflected in the rate of return on the annuity. The internal rate of return is comparable to other very safe financial instruments.

Further reading: http://www.fpanet.org/journal/articles/2006_Issues/jfp0106-art4.cfm