Increase Your Listings with Structured Installment Sales

Written by Posted On Thursday, 16 April 2020 11:13

Your prospective clients have an investment property with significant equity they seem eager to sell.

They are not interested in a 1031 exchange. They just want to sell and use the money to supplement a retirement that doesn’t involve property management.

You are excited because you know the market and are convinced there will be high demand for the listing. You may even have a buyer in mind.

A preliminary analysis of their situation reveals a low mortgage balance and substantial appreciation since they originally purchased the property. They will do well on this sale and things are looking promising

Then reality hits when they discover the profit they were hoping to realize will be dramatically lowered because of all the taxes due on the transaction.

They thank you for your time but decide they may as well continue managing the property since the outcome they had hoped for cannot be achieved.

As a real estate agent, you may have more lost opportunities due to circumstances similar to these than you realize. Good profit but the clients can’t get around the tax issues.

Or can they?

Structured Installment Sales to the Rescue

By positioning the sale to include a variation on a traditional installment sale as outlined in 26. U.S. Code § 453, you can demonstrate how the property can be sold at the same cost but in a fashion that eases their tax burden and increases their net profit

All of this can be accomplished at no additional cost to the buyer or seller.

Structured installment sales exist to permit the sale of qualifying appreciated assets such that some of the sales proceeds are paid out over time. In so doing, sellers can often lower capital gains, net investment income taxes (NIIT) and other taxes they may otherwise owe. In some instances, these taxes can be eliminated altogether.

Because ours is a progressive tax system, the taxes owed when recognized in a single year will normally be much higher than they would be if that same figure were broken up into a number of smaller sums received over time. For this reason, creating a sales agreement that requires sales proceeds be paid out according to a future payment schedule usually results in tax savings.

But it’s not simply a matter of choosing to access one’s funds in the future. The terms need to be contemplated in advance of closing and the proper language and documents incorporated into the sales agreement.

The Mechanics of Structured Installment Sales

Once the property is identified, the seller will need to consult with both a tax adviser and a duly licensed and appointed expert specializing in structured installment sales. Together these experts will determine a payout schedule that will spread the income and the accompanying tax liability out over several years. This “Periodic Payment Schedule” will become part of the sales agreement.

There are some required disclosure documents buyer and seller will BOTH need to execute as well as a formal nonqualified assignment document all of which are prepared and provided by a structured installment sale firm coordinating the agreement.

During closing, the percentage of the sales price representing the present value (cost) of the future guaranteed future payments will be transferred to a special purpose assignment company which will further facilitate the process by purchasing an annuity or U.S. Treasury obligations sufficient to satisfy the commitment spelled out in the sales agreement.

Sale Closed, Client Happy

Clients will be understandably appreciative if you can help them sell their property AND save them money on taxes during the process. (Caution: Avoid giving tax advice unless qualified) Further, clients who might otherwise be content sitting on the sidelines may show renewed incentive in selling once they understand the structured installment sale concept. At the very minimum, agents armed with this helpful knowledge will demonstrate an added level of professionalism which could lead to more listings.

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Dan Finn

Dan Finn, the owner of Finn Financial Group, LLC in Newport Beach, CA, placed his first structured installment sale in 2006 and has been a leading advocate for this unique tax deferral strategy since then. Licensed throughout the United States, Dan is available to consult on transactions across the country at no cost to the buyer or seller.

Dan can be reached at (949) 999-3322.

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