DEFER TAXATION — SALE OF APPRECIATED ASSETS

If you are selling highly appreciated assets (such as real estate or a business) you can choose to receive payments over time versus a lump sum at the time of sale.   Placing the proceeds from the sale on a pre-tax and on a tax deferred basis, is called a Structured Sale. A structured sale is a special type of installment sale pursuant to Internal Revenue Code Section 453. Installment sales permit sellers to defer gains on the sale of a business or real estate to the tax year in which the related sale proceeds are received. Structured sales allow the seller of an asset to pay taxes over time.  The payments are guaranteed by a high credit quality, alternate obligor who accepts assignment of the buyer’s periodic payment obligation. 

In a structured sale, rather than the buyer paying the installments, the buyer pays cash, some of which is used as consideration for a third-party assignment company to accept the payment obligation. The assignment company then purchases an annuity from a life insurance company. Case law and tax precedents have long supported substitution of obligors include Rev. Rul. 82-122 amplifying 75-457 and Wynne v. Commissioner 47 B.T.A. 731 and Cunningham v. Commissioner 44 T.C. 103. In addition, a properly handled transaction will avoid issues with constructive receipt and economic benefit.

A tax advisor should be consulted regarding tax consequences, if any.

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