Part 1 covered the basics of an Installment Sale. Part 2 will explain the concept of a Structured Sale. Part 3 will then explain how both the Installment Sale and Structured Sale have led the way for the Insured Structured Sale.
Let's say we are selling a piece of real estate for this example. A buyer is located and a sales price negotiated. Instead of the buyer making payments to the seller over time, the buyer can assign his obligation to make those payments to an Assignment Company.
The buyer effectively gives the sale proceeds in a lump sum to the Assignment Company, who in turn agrees to make payments back to the seller over a certain period of time and at a specific interest rate. Thus, the risk is transferred to the Assignment Company and away from the seller.
The seller only has to pay capital gains tax on the amounts he receives as principle as he receives it in the payments from the Assignment Company. He has no access to the bulk of the money, so no constructive receipt has happened.
Until very recently, the only Assignment Companies offering structured sales were owned by large insurance companies. The Assignment Company re-insured itself by investing the funds into a Single Premium Immediate Annuity with the associated insurance carrier. The annuity was then annuitized over the length of the contract and payments were made from the insurance carrier directly to the seller via another agreement.
The interest rates of an immediate annuity are fairly low, but the payments are insured by the carrier. If you chose the lifetime payout option (which would have the highest monthly payment), whenever you passed away whatever money had not been paid out to you was kept by the insurance carrier.
Again, this option is still available and can be used to spread out the payment of capital gains tax.
Part 3 will discuss a newer and more flexible version of the Structured Sale. It takes the good parts of the Installment Sale/Structured Sale and improves on some of the downsides as well.
Paula Straub
askpaula@savegainstax.com
http://www.savegainstax.com/
760-917-0858
p.s. If you need to determine how much you can save in capital gains tax, fill out the Qualification Questionnaire and get a quick and confidential personal response.
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