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Structured Installment Sale - Updates
By mauch | November 9, 2007
There are many things floating around the internet about the Structured Sale Annuity. Just like with anything on the internet, many of the comments and resources on the Structured Sale are not fact based and actually do a dis-service to sellers who are looking for solid ways to safely defer their capital gains taxes.
Recently a small post was found on the subject that we felt it was worth commenting on in order to provide a fair discussion.
The post thread is shown below. I hope that this helps some sellers who are considering the Structured Sale or any other tax deferral strategy.
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I did a search regarding this issue and could not find a single thread that mentioned this. I am looking for information concerning structured installments for property to reduce capital gains.
Situation for my father, age 60, single, makes 60K+ year as psychologist/teacher, and $250K+ in retirement accounts. Other property held is his current home of $350K being kept but rented to another party and commercial office property valued at $900K+. There is no other debt (current mortgages, credit cards, loans, etc).
He is purchasing a property now at $690K, putting down $350K, and getting mortgage on the rest. He owns a beach front vacant property in SC that has a base price of $60K and is appraised for $850K. If sold at or near appraised value, we’d be looking at a capital gains tax of ~$115K. Ouch!
We are looking at a reverse 1031 exchange, however it is entirely uncertain whether we can sell a beach property in the winter months within the allowed 180 window (which will end in mid-March as the current closing is in a few days). If the beach doesn’t sell, then we lose the $5000 it costs to do the paperwork for the reverse 1031 exchange as well as the capital gains advantage.
From my understanding, the ‘Structured Installment Sale’ allows the seller of a business or real estate to defer the recognition of the taxable income/gain when ultimately using all or part of the net sale proceeds to fund an annuity (issued by a highly rated insurance company) to provide a fixed stream of future income that can be tailored to meet future needs. Once the mortgage for the new house is paid off, he really doesn’t need a lot of money coming in (no other expenses, mortgages, or loans, massive travel plans, etc). Everything would eventually be willed to me upon his passing, so we’re both trying the determine ultimately what the best move may be.
Should we try to go through the reverse 1031 and take the chance that a beach property will sell in the winter, or just do a normal mortgage purchase, pay it off whenever the beach property sells, and just bite the capital gains bullet?
A lot of the websites out there seem to be shills or advertising more than being neutral and purely informative, so I wanted to ask to see what experiences some may have or advice. The reverse 1031 is iffy, but if it works out seems to be the best bet, however I like to plan for the real chance that it will not go through and prefer to be prepared.
Mike
Date Posted: Oct/24/2007 3:20 PM
Rating: 0The ‘Structured Installment Sale’ is a bad idea IMHO.
Some relatives who are in the insurance industry tried to sell my Grandmother on this as she sold her house to move to a retirement home. Luckily, the buyers did not like it when they found out my Grandmother wanted to involve this third party insurance company in the middle of the real estate transaction. The Structured Installment Sale did not happen to our relief.Don’t do it! Pay the capital gains tax on the property if he wants to sell it or do a 1031 exchange.
It would be worth enlisting the help of a good accountant to deal with the tax implications.
For example, he can exclude $250k the gain on the sale of his home as long as he meets certain criteria (basically living in it for a total of 2 years in the last 5 years). He might benefit by doing that now before he loses that.
OUR RESPONSE:
Hi Mike and “theman2″,
First off, I want to identify myself as coming from the Structured Annuity industry. I saw this post and just wanted to clear up a few mis-understandings by “theman2″ and to shed a bit more light on the subject for Mike.
Actually, the Structured Installment Sale is a good strategy for many people. And, like all other strategies (including simply paying the tax), it is not right for many people as well.
It is kind of a misguided blanket statement to say that the Structured Installment Sale is not good for everyone as “theman2″ implies. Just like with all strategies, they all cater to specific needs and goals. Many people may be better off simply paying the tax… while a good majority would be way better off by using some sort of tax deferral strategy.
No knock against “theman2″, but he gives no specific reason for advising to “Don’t do it!”. Most of the time resistance for more advanced tax deferral strategies are because of a lack of knowledge on the topic. People tend to shy away from things that they don’t understand or have never heard of.
Mike, the Structured Installment Sale may or may not be the right strategy for your father.
However, people that it may be perfect for are those:
- Who are looking for a guaranteed income stream that they do not have to worry about for retirement
- Who would like to defer capital gains tax
- To leave the possibility for future tax planning on those funds open… remember, once a seller pays the capital gains tax there is no chance to ever decrease the tax or use the funds for their benefit
- Who do not want to have to monitor the investment or the stock market
- Who want to protect that portion of income for retirementThe Structured Installment Sale is to create security, to defer tax, and leave the possibility for future tax planning on those capital gains open. For instance, lets say that in 10 years Congress comes out with a new bill that eliminates capital gains tax for certain people. If the seller simply pays the tax now, they of course have no chance to ever take advantage of any tax changes that may go in their favor.
However, if they utilize some sort of tax deferral strategy (installment sales, structured sales, charitable remainder trusts, etc.), they can take advantage of that tax law change and possible reduce their capital gains tax bill.
Of course, many sellers will not benefit from the Structured Installment Sale. Drawbacks are:
- The funds are in a fixed annuity, which of course means there is low liquidity
- The fixed guaranteed annuity earns a conservative return (between 3.5% - 5.5% depending on the specific payout terms your father would like)Regarding the comment by “theman2″ about the buyer not liking the idea of involving a third party insurance company, this is a road block that some transactions face.
The Structured Installment Sale is similar to a 1031 exchange in that they both contain a 3rd party that the funds must flow through. With a 1031 exchange, it is a qualified intermediary. These intermediaries hold the funds until a suitable property is found.
In the time the funds are held the QI actually claims much of the interest earned on the funds as their profit. Recently there has been many cases of QI’s who haphazardly invest the funds in the account and end up losing the money of the seller.
Of course, this is somewhat rare, but it has happened at an alarming rate in the last 2 years. So, be sure to find a trustworthy QI with a good reputation.
With the Structured Installment Sale, the funds are instead sent to a company called an Assignment Company. These assignment companies are partially owned by the insurance company (Allstate Life Insurance has their own… and Prudential Life Insurance has their own).
The large life insurance companies 100% back and guarantee the performance of the assignment company, which equates to extreme security that is often not found in the 1031 exchange industry.
The aspect that many people who do not understand the structured annuity industry (our company has been in the industry for over 24 years) become afraid of with the Structured Installment Sale is that the insurance companies have chosen to locate their Assignment Companies in the country of Barbados. This initially frightens people because they have heard the stories of illegal tax shelters using Barbados and other nations offshore.
In reality, Barbados and the U.S. have several tax treaties that do allow and make 100% legal certain transactions to take place. Among them are the U.S. Barbados Tax Treaty - Article 18… which specifically allows the transmission of annuity premium funds to Barbados U.S. income tax free. This does not mean that the seller is not paying taxes… it simply means that the U.S. has agreed not to tax the Assignment Company on the annuity premium funds they receive.
Of course, if the Assignment Company were located here in the states, the IRS would tax the annuity premium funds as income… reducing the sellers payout.
Once the funds reach the Assignment Company, they send them over to the annuity issuer they are associated with (either Allstate Life or Prudential Life) to purchase the fixed and 100% guaranteed annuity to pay the seller the installment payments.
These assignment companies are not new. Actually, in the Structured Settlement industry, they have been used for over 25 years and are once again… completely legal and out in the open.
Really, just like with anything, learning the facts and being educated on the subject is the best way to find out the truth.
Anyhow, I didn’t mean to write a post this long. I just noticed this post and wanted to clear up a few things.
In summary, the Structured Installment Sale may be a good option for your father. However, just like with any strategy, it is always a good idea to find out the facts first… seek advice from your CPA… and move forward from there.
People that lay out blanket statements like “just pay the tax and be done with it” are really doing a dis-service to sellers. It is like saying, “don’t try to legally lessen the amount of taxes you pay to Uncle Sam”. Kind of crazy, but many people do still have that attitude.
I hope that helped to put a different side to the story. The thing to do is to contact a reputable company who offers the Structured Installment Sale, gather facts and information on the strategy (both the bad and the good), take the facts to your CPA or Tax Attorney, and make an educated decision on the best course of action. There really is no better way to do it.
And yes, I am with a company who is a leader in the Structured Annuity industry. Our company focuses on education first and foremost. If you would like me to forward you information so you can make an informed decision on your own, feel free to contact me at 800-666-5854 or email me at:
mauch[at]structuredsalespro[dot]comIf this has helped, excellent. If not, I urge you to check out all of your options in an objective and fact based manner before you simply choose to pay the tax and be done with it.
Cheers,
Trevor Mauch
Settlement Professionals Inc.
I’m sure many sellers and advisors out there have had some of the same questions, so I hope this has helped to clear things up a bit.
So, if you are selling highly appreciated property and you are not sure what you should do… my advice is to become well educated on the strategies you are looking at, involve your CPA in the decision, and move forward on the strategy that makes the most sense for you.
Topics: Legal issues, Tax deferral talk, Structured Sale |