Structured Sale

Structured Sale

A structured sale is something like a (PAT) in that it allows a seller to sell highly appreciated assets such as real estate and, at the same time, defer the payment of capital gains tax (and recapture of depreciation, if applicable).  However, instead of a trust buying the asset in exchange for a private annuity contract payable to the seller (which may have the disadvantages described in the section of this website), the buyer agrees to cooperate with the seller’s structured sale by entering into a simple unsecured installment obligation which at closing is assigned to an assignment company established by an insurance company.  The portion of the purchase price upon which seller wishes to defer capital gains tax is then transferred to the assignment company by the closing agent and the assignment company assumes the obligation to pay the buyer’s installment obligation.  Although the buyer is not released from the installment obligation, he has actually prefunded payment of that obligation out of the portion of the purchase price sent to the assignment company.  After closing, buyer exits the scene owning the property he purchased subject to any financing the buyer arranged to complete the purchase.

The assignment company then buys an insurance company annuity from its parent insurance company to guarantee that the assignment company will make the installment payments to the seller.  Except for the few simple documents that set up the installments, to the buyer of the property it ends up feeling like a regular sale.  The buyer can close upon purchase money mortgage financing made available by a bank or other lender of  his choice just like in a standard closing).  The closing agent for the sale simply sends the agreed amount of the seller’s proceeds to the assignment company instead of giving those funds to the seller.  This part is similar to the closing agent sending funds to seller’s qualified intermediary company if seller was engaging in a 1031 exchange--the money is sent to the assignment company instead.

Again, this is similar to a PAT, but removes the risk that the payor under the annuity (the in the case of a PAT) will run out of money as a result of investing the trust fund poorly.  Instead, with a structured sale, the payor is a large insurance company.  Allstate currently dominates the structured sale market, but other insurance companies are catching on and offering this alternative for sellers.

Structured sales are an outgrowth of the structured settlement market.  An example of a structured settlement is a situation where someone is seriously injured, sues the negligent party and either settles or wins the lawsuit.  Instead of accepting a lump sum amount, the plaintiff agrees to accept an insurance company annuity contract (usually arranged by the defendant’s insurance company) in order to make sure that payments will last for the rest of the injured person’s life.  The key to seller receiving installment sale benefits is to avoid the doctrines of “constructive receipt” and “economic benefit” which, if properly documented and carried into effect, a structured sale will accomplish.

Structured sales may be used to defer capital gains and depreciation recapture, if applicable, for long periods of time so that the full sale price can grow tax free until the annuity payments start.  Of course, the asset sold is out of the seller’s estate for federal estate tax purposes (like a PAT) since the annuity is valueless upon the seller’s death.  There are various arrangements that mitigate the likelihood that the person will die too soon and not receive the benefit of all of the annuity payments.  Remember, however, that in a structured sale as with a PAT, all capital gains and depreciation recapture will ultimately be paid, unlike a 1031 exchange where the tax might be permanently avoided by death and stepped up basis.