Tax Benefits of a Structured Installment Sale

A man points at a graphic that says "Taxes", symbolizing the tax benefits of a structured installment sale.

What are the tax benefits of a Structured Installment Sale?

So you might be wondering: what are the specific tax benefits of a structured installment sale? On this page, we’ll go into detail about why spreading your tax payments out over time (tax deferral) is so powerful, and why it can reduce the overall tax rate you pay.

The capital gain tax rate is an increasing tax rate from 0, 15 to 20% depending on how large a taxpayer’s adjusted gross income is and how large the capital gain is on the sale of an appreciated asset. For example, a capital gain – profit of $300,000 or more can easily push a taxpayer into the highest capital gain tax rate of 20%. If you as the Seller, instead of taking a single lump sum payment at closing (“traditional sale”), enter into an Installment Sale – by spreading the payment of the gross sale proceeds out to you over a number of years, you can often save 5% of capital gain taxation by dropping your capital gain tax rate down from 20% to 15%.

A taxpayer with a large capital gain on the sale of and appreciated asset might also typically be subject to a penalty tax of 3.8% called the Net Investment Income Tax (“NIIT”). Using an Installment Sale, you as a Seller can often avoid and completely eliminate this additional 3.8% Tax. Also, if you as a Seller have depreciated your real estate investment to the point of selling it, you pay a 15% recapture income tax on the amount of the depreciation deduction taken. Unfortunately, recapture income taxation is not deferred in an installment sale transaction and must be paid even if the seller sells in an installment sale transaction.

State Taxes to you as the Seller may also be significant and can be delayed and/or eliminated depending on your state of residence. Let us assume a State tax rate of 3.1%, which can be deferred over the number of years selected for the installment sale transactions.

Example: Seller sells real estate with a $700,000 profit – capital gain and $400,000 of depreciation deductions taken.

With a Structured Installment Sale, you as Seller have an additional $188,300 invested and working for you to generate more earning income cash flow.

In a traditional sale with a single lump sum payment, Seller would face the following taxation:

Federal Capital Gain Tax Rate at 20% on $700,000 = $140,000
Federal NIIT Tax at 3.8% = $ 26,600

Federal Recapture Tax at 15%

on $400,000 Depreciation = $ 60,000
State Capital Gain Tax at 3.1% = $ 21,700
Total Taxation from a Traditional Sale = $248,300

Taxes Immediately Saved with an Installment Sale Transaction:

Immediately upon implementation of an installment sale, you can potentially, depending on the number of years selected to receive payments, immediately save the following in taxes:

Federal Capital Gain Tax Rate reduced from 20 to 15%, an immediate tax saving of 5% x $700,000 = $ 35,000
Elimination and avoidance of NIIT Tax at 3.8% x $700,000 = $ 26,600
Total Immediate Tax Savings with an Installment Sale = $61,600

Taxes Immediately Deferred with an Installment Sale:

Federal Capital Gain Tax reduced from 20 to 15%, thus:

15% x 700,000 = $105,000
State Capital Gain Tax at 3.1% on $700,000 = $ 21,700
Total Tax Deferral with Installment Sale = $126,700

Total amount of extra gross sale proceeds retained to be invested to benefit Sellers using an IRC section 453 Installment sale, equals Total Immediate Tax Saving added to Total Tax Deferral:

$61,600 + $126,700 = $188,300 Extra Gross Sale Proceeds Retained

ISR’s Structured Installment Sale increases your net worth and enhances your income earning potential.

Sellers implement an IRC section 453 Installment Sale to retain more gross sale proceeds to provide more investment yield returns. More of Sellers’ gross dollars investment means more earning cash flow potential to increase net worth. More retained gross sale proceeds equal an increase in sellers’ net worth and a safety downside investment protection in a recessionary economy.

ISR’s “Structured” Installment Sale

Every Sellers’ Installment Sale transaction is custom tailored to meet the specific financial needs of the Sellers. ISR uses the term “structured” to mean a customized transaction designed by a capital gain tax reduction transaction LLM Taxation Attorney.

ISR preferences investing the money that Buyer transfers at closing into private wealth management at top tier private wealth banks, further, managed by a top 250 wealth advisor located in Boston, Massachusetts. This provides two levels of safety as a mechanism to provide Seller’s security that investment criteria to produce predictable installment cash flow disbursements. Sellers can more flexibly choose installment sale payment streams to be quarterly, semi-annually, annually or to delay payments first to build up and increase fair market values of investments prior to the first payout being made to sellers.

Other service providers simply use the term “structured” to mean money is invested into an annuity with some downside investment protections.

ISR often feels that the cost of such annuity investments is simply too high and not flexible and that better results can be achieved with ISR’s private wealth management strategies.

When ISR is directed by a Seller to present an annuity type investment scenario, ISR utilizes a specially created annuity product specifically designed to produce installment type cashflow payouts.

ISR’s “Structured” Installment Sale is a better transaction!

Installment Sales are Buyer debt driven sale transactions where the “Seller is acting as a Lender.”

Seller is the benefit holder of the periodic payment cash flow streams (obligations) Buyer is making to the Seller.

ISR’s transactions assumes (via a debt assumption agreement) these obligations from Buyer and collects Buyer’s money at closing to put in place sound financial planning and implementation to achieve these periodic cash flow payments to Seller.

Conversely, other service installment sale providers simply get assigned Buyer’s payment obligations. This assignment transaction structure has less tax compliance integrity as it adversely raises issues of “Assignment of Income Doctrine” concerns.

ISR’s “Tax Deferral Expertise” is based on 20 years of LLM Tax Attorney, Capital Gain Tax Reduction Transactional Experience!

ISR is founded and directed by a retired LLM Taxation Attorney. He has 20 years of capital gain tax deferral expertise experience in the sale of appreciated real estate.

Since 2016, he has shifted tax deferral focus from 1031 Exchanges to Installment Sale Seller transactions with such transaction sizes ranging from $300,000 to $16 million. Now, ISR takes these successes and hand-selects which tax reduction advisors we bring on to work with Sellers of appreciated real estate.

Installment Sales applies and can be implemented on personal real estate that has never been rented out (a disqualification factor for 1031 Exchanges).

Installment Sales also often are a better fit for Sellers of appreciated investment real estate who don’t want to exchange into and have to manage a new investment property or take on more bank financing debt.

Installment sales can also be used to save a failing 1031 Transaction. Contact us today to learn more!