By: Chad D. Ettmueller
When selling real estate, one of the biggest questions is what to do with the proceeds and how much tax will be owed. In some instances, the seller will utilize a 1031 Exchange to defer taxes by swapping sales profits into a replacement property. Others may need larger cash flow streams over a specific time frame and want to defer taxes while generating a return on the sale proceeds. One potential solution is a Structured Installment Sale (SIS), which allows sellers to defer immediate tax obligation by placing any portion of their sale into an Internal Revenue Code (IRC) Section 453 Structured Installment Sale.
The IRS cannot tax a seller on proceeds for which they have not taken “constructive receipt.” In as much, Section 453 allows an individual selling a business, property, or other appreciated assets (such as art or memorabilia) the opportunity to maximize the profits from the sale and avoid an immediate tax obligation in the year of sale by placing proceeds from the transaction into a structured annuity product.
The portion of the sale proceeds that are placed into the SIS grows on a tax-deferred basis, and the seller can choose the length of the future payment period. This provides sellers greater flexibility in managing their cash flow and can help them maximize the profits from the sale—and even entertain a lesser offer—knowing that the combination of tax savings and annuity growth will far outweigh the lower sales price.
Structured Installment Sales are an IRS-approved method of deferring taxes, and the funds are invested with highly rated insurance carriers. The seller can choose between fixed and indexed annuity options, with the payment schedule customized to meet his or her unique needs. The first payment can be deferred for up to 40 years, and the seller will owe a pro-rated capital gains and pro-rated ordinary income tax obligation in the future year(s) when the future annuity payments are received.
Structured Installment Sales (SIS) offer a great alternative to 1031 Exchanges, as they allow a seller the opportunity to keep cash flow flexible and to reinvest the proceeds in other assets. Many 1031 participants are opting for an SIS and scheduling lump sums in 3, 5, or 7 years, which gives them time to investigate new properties and jump back into the real estate market at a future date. Unlike other exit strategies, there are no fees associated with an SIS which saves closing costs.
With no investment minimums or maximums, every sale qualifies for Structured Installment Sale treatment. The only requirement is that the SIS must be incorporated into a sales contract. If designed properly, the SIS can provide necessary financial security to the seller and provide generational wealth for years to come. If you are considering selling real estate or other appreciated assets, an SIS may be the right fit for you. Talk to your tax advisor, as well as an accredited land consultant, and visit www.jcrsettlements.com/installment-sales to learn more about how an SIS can benefit you.