Structured Sales: An innovative solution to the capital gains tax issues involved in the sale of personal property, land or business - By: Chad Ettmueller, Posted on: 2007-01-23

The Challenge
For most people, real estate is the single largest asset in their financial portfolio. As a result, there is little doubt that the sale of property - be it a primary residence, investment or rental property, raw land, or a commercial parcel - all bring monumental tax anxiety to mind for the selling party. With skyrocketing values across the nation over the past several years, these concerns are paramount to individuals and families who desire to limit the tax hit Uncle Sam takes on their sale.

Until now, a selling party had little option on the sale of their personal residence, and only a handful of options on the sale of investment properties, raw land or commercial real estate. The now defunct Private Annuity Trust, Tennant In Common, Charitable Remainder Trust and 1031 Exchange are all well known, but carry some drawbacks with their execution and administration, not the least of which, are the significant costs of setup and annual management.

While not the panacea to every situation, a new and exciting product, the Structured Sale, is rapidly growing in popularity. The Structured Sale is providing an opportunity to avoid immediate tax liability and grow funds in a customized manner they design.

Not Your Grandfather’s Annuity
The Structured Sale Annuity, vested in Section 453 of the Internal Revenue Code, takes advantage of two IRS Revenue Rulings (82-122 & 75-457) and allows a selling party to place any portion of their proceeds into a fixed annuity product with a guaranteed yield paid back to the Seller. Unlike traditional annuities, however, the new Structured Sale Annuity product offers unprecedented flexibility in how the guaranteed funds are paid out. The Seller can truly design the payment schedule to meet his or her unique financial needs. Monthly, quarterly, semi-annual or annual payments are all available, as are future lump sums in any combination. The Seller has the choice of starting payments immediately (regardless of their age) or deferring payments up to 20 years, maximizing the growth and creating a subsequently higher yield on the back end. This is a great tool to supplement retirement, fund a college education for children or grandchildren or provide for future lump sums that can be used to take advantage of other investment opportunities or help pay large estate tax burdens.

While all of these advantages are exciting in and of themselves, perhaps of greater importance to the Seller is the fact that a guarantee period can be placed on the payment schedule, ensuring that the annuitant’s Estate will continue to receive funds for as long as 40 years, even if they are deceased. Moreover, this product offers guaranteed financial security, allowing your client to be more aggressive with other investment opportunities. Best of all, the payments are guaranteed by a leading life insurance company with an A+15 rating by A.M. Best., and are taxed at a pro-rated and deferred capital gains and ordinary income rate, in accordance with form 6252 of the IRS.

Adding Value to the Process
How many times has a Seller sold their listing for less than they had hoped? By utilizing the Structured Sale concept, the Seller can now afford to take a smaller purchase offer, knowing that they avoid immediate taxation and can grow the net proceeds to a future dollar value ultimately higher than the asking price – many times significantly so. Becoming knowledgeable about this new option will allow you as a real estate professional, to provide sage counsel to your client. By going above and beyond for your client and showing a sincere interest in their financial future, you will not only distinguish yourself as an expert, you are positioning yourself for referrals.

If you represent the Buyer in a transaction, the Structured Sale offers an opportunity to purchase property at a lower acquisition price, offering the seller all of the aforementioned benefits and most important – leaving vital working capital for the Buyer to make the necessary improvements they wish to make with the property.

The Fine Print
Does the concept of the Structured Sale Annuity seem too good to be true? There are indeed some restrictions imposed by the IRS, but they are all manageable. In order for the benefits described herein to be realized, the Seller must avoid constructive receipt of the funds. The Buyer, at the Seller’s request, will direct appropriate funds to be sent from the escrow account to the Assignment Company owned by the life insurance company. The Assignment Company in turn purchases the identified annuity and promises to make all future periodic payments to the Seller. A simple one page sales agreement between the Buyer and Seller includes the necessary language allowing for the structure, with the terms of the agreement governing the payment schedule.

As the minimum premium the life insurance companies will accept is a mere $100,000, you are providing your client a wonderful service when you have them consider a Structured Sale benefit analysis as part of their sale. There are no associated charges, ever, with the purchase or management of the funds by the life insurance company or the broker placing the annuity – a further benefit over the aforementioned PAT’s, TIC’s CRT’s and 1031 Exchange.

Show Me the Money
Assume your 50 year old client sells his home or property for $1,000,000. He needs to keep $500,000 out to pay some associated obligations and have additional money immediately available. He wisely invests the remaining $500,000 through the Structured Sale product. Following are some examples of how his proceeds might be returned to him:

Option #1:
Cash at Closing: $500,000
Structured Annuity: $2,538 per month, beginning one month from closing, for life, with a 30 year guarantee ($913,680).
Total Sale: $1,413,680
(Should your client live 40 years, the life company will continue to pay the obligation. Should your client decease ten years into the agreement, the life company will continue to pay his Estate for the remaining 20 years of the guarantee period.)

Option #2:
Cash at Closing: $500,000
Structured Annuity: $1,810 per month, beginning one month after closing for 20 years only ($434,400).
$500,000 lump sum payment made in 20 years.
Total Sale: $1,434,400
(Again, this is a classic retirement scenario with a large lump sum on the back end that will assist in paying Estate Taxes to your clients heirs, or fund potentially necessary assisted living costs.)

Option #3:
Cash at Closing: $500,000
Structured Annuity: $5,057 per month, beginning at age 60, for life with a 20 year guarantee ($1,213,680).
Total Sale: $1,713,680
(This is a classic retirement scenario that allows for substantial growth and deferral of tax liability.)

Option #4:
Cash at Closing: $500,000
Structured Annuity: $1,700 per month, beginning one month after closing for 10 years only ($204,000).
$3,030 per month, beginning in 10 years, for 10 years only ($363,600).
$5,425 per month, beginning in 20 years, for 10 years only ($651,000).
Total Sale: $1,718,600
(Another retirement scenario with step increases to account for inflation.)

Article Source: http://www.southerncaliforniarealestateagent.com/submit-real-estate-articles

Please feel free to call us if you have any questions or if you want to learn more about how Structured Sale Annuities can help you provide the perfect financial solution for your client and effectuate more efficient closings. Please contact Chad Ettmueller at Atlas Settlement Group by calling (404) 926-4160 or visiting us online at: atlasstructuredsales.com

Please Rate this Article

5 out of 54 out of 53 out of 52 out of 51 out of 5 

# of Ratings = 1 | Rating = 5/5