What is a Structured Sale?

A structured sale is a special type of installment sale pursuant to the Internal Revenue Code, IRC § 453. Installment sales permit sellers to defer recognition of gains on the sale of a capital asset to the tax year in which the related sale proceeds are received. Capital assets are defined as stock, investment real estate, bonds, mutual funds, partnerships and collectibles. Structured Sales allow the seller of an asset to pay taxes over time while having the payments 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 of a third party assignment company to accept the payment obligation. The assignment company then purchases an annuity from a life insurance company with high financial ratings from A.M Best or Moody's. Case law and administrative precedents support the substitution of obligors. In addition, a properly handled transaction will avoid issues with constructive receipt and economic benefit.

While negotiating the installment payments, the seller is free to customize their payment streams with a great deal of flexibility. The seller recognizes capital gains in each year an installment payment is received. Interest is imputed and taxed annually, even in years during the contract where no installment payments are received. Taxation is the same as if the buyer were making installment payments directly. For the buyer, there is no difference from a traditional cash-and-title-now deal, except for additional paperwork. Because of tax advantages to the seller, structuring the sale might, however, make the buyer's offer more attractive. Because the buyer has paid in full, the buyer gets full title at the time of closing. There are no direct fees to the buyer or seller to employ the structured sales strategy. The structured sale specialist who implements the transaction is paid directly by the life insurance company who writes the annuity.