Tax deferral structured sale annuity
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How to Defer Capital Gains Tax When

Selling Real Estate

Defer capital gains tax when selling real estate

With the recent increase in home and land values across the country, you may own a highly appreciated piece of real estate. At some point you may need to convert it to cash to be able to fund your financial goals or to fulfill certain commitments. However, you’ve also likely considered the potential tax consequences a sale would incur most notably having to recognize the gain and pay the accompanying tax in the year that the sale transaction occurs. This might make an outright sale to a third party unattractive or unrealistic.

One option you have as a seller would be to arrange the transaction as an installment sale according to IRC Code 453. In short, you would agree to finance all, or part of the sale price to the buyer. The buyer would be required to pay the agreed upon price over a period of time, usually with an amount of interest attached to the unpaid balance. This option will allow you to defer recognition of your gain (each installment payment would be part return of investment, part gain, and part interest).

This is not without its problems however. You will have to depend on the buyer’s ability to pay over the specified period of time. This ability may be jeopardized if the buyer experiences financial difficulties. While you would have the option to foreclose and regain the property, your original intent to sell would not be accomplished, and you’d be right back where you started. Except that you may have the additional issues of regaining your property, but in worse condition than when you sold it and in a possibly depressed real estate market.

One solution gaining increasing popularity would be to use a non-qualified structured annuity to fund the installment sale. You and the buyer will agree on a sales price, on a stream of future installment payments, and on the timing of the payments. The buyer will then assign his/her obligation to make those future payments to an insurance company by purchasing a structured annuity in exchange for an insurance premium paid by the buyer. The insurance company will then be the guarantor of the future installment payments. You as the seller still get the tax benefit of an installment sale and you can rest easy knowing that your financial future does not depend on the creditworthiness of the buyer, but on the financial strength of a major life insurance company. This is called an Ensured Installment Sale (aka Structured Sale).

To understand more fully the benefits of an Ensured Installment Sale (Structured Sale) in your particular situation, please contact us.


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