Structured Sale of Real Estate
Combining the techniques of structured settlements and installment sales results in a bourgeoning real estate technique called a structured sale. In a structured sale of real estate, it is important to be knowledgeable about the way these two techniques work individually and then how they work together.
The structured sale of real estate concept is exciting many sellers of appreciated real estate because it delivers the desired results without the risks of other deferral methods.
A structured sale of real estate is a combination of two concepts; installment sales and structured settlements.
Under an installment sale, a taxpayer has long been permitted by section 453 of the IRS code to arrange a sale of property so the proceeds are taxable as received across several years, without fear that the stream of payments will be accelerated and taxed in the year of sale.
While the installment sale method is tax friendly to the seller, it has not been with out risk:
Credit risk or reliance on the buyer’s performance of timely payments over time. Repossession risk which is an outcome of credit risk.
The seller may be forced to reclaim the property at a reduced value. Prepayment risk due to early note disposition.
Early repayment by the buyer accelerates taxation and possibly forces reinvestment under less favorable conditions.
Design limitations.
Due to risks noted above, it is important to not to stretch out payments (defer taxes) for too long. To mitigate this risk, some clever folks came up with the idea of marrying to the concept of a “structured settlement”. This concept came in existence in the 1970’s because of Internal Revenue Service rulings that said that periodic payments to claimants in personal physical injury cases were free of federal taxation as long as certain conditions were met. This IRS acknowledgment made the concept of using periodic payments to help injured parties and defendants resolve claims popular. Before this time, U.S. common law promoted lump sum payments to claimants.
To bring these two concepts together for a structured sale of real estate, the seller and buyer have to agree to the terms of a document called the settlement agreement and release. This document specifies the terms of the periodic payments the buyer will make to the seller. This document is carefully drafted and any monies that subsequently flow are carefully handled to assure that the seller does not spoil the intended tax benefits under either of the separate installment sale or structured settlement tax provisions.
If you are looking to sell your real estate and defer taxes on the sale of that property, this new concept of a structured sale may provide another viable option for you.
