Selling Commercial Property Using a Structured Installment Sale

Selling a commercial property that has grown in value since its purchase will trigger capital gains taxes on the profits, which can substantially reduce the revenue from the sale. Fortunately, there are several strategies to mitigate and defer capital gains tax liability. One method is the structured installment sale.

Selling a commercial property with a structured installment sale comes with advantages and disadvantages. Sellers must follow strict IRS rules to enjoy the tax benefits that structured installment sales can offer. Getting legal, financial, and tax guidance can be invaluable in deciding whether the installment method is right for you.

At 453 Trust Powered by Pennington Law, we can answer all your questions on the structured installment sale of real estate, both commercial and residential. Our national practice of seasoned professionals has extensive experience advising clients on matters such as tax law, asset protection, financial reinvestment, and wealth and fiduciary issues.

Unlike other firms that outsource aspects of their clients’ cases to outside professionals, we have built an IRS-compliant program under one roof to ensure we can offer you comprehensive support. Contact us today for a free consultation on tax deferral strategies for commercial real estate.

How Structured Installment Sales Work for Commercial Property

Structured installment sales allow owners of commercial real estate to sell their property while managing or deferring capital gains taxes. These transactions utilize the installment sale tax rules under Internal Revenue Code §453, which allow an asset owner to accept installment payments on the purchase price when selling their asset and to pay capital gains taxes only on the amount they receive in a tax year.

A structured installment sale involves the buyer purchasing an annuity from a financially secure insurance company and assigning their payment obligation under the installment arrangement. The annuity then makes future periodic payments to the property seller according to the parties’ agreement. The seller reports the payments as they are received each tax year and pays any applicable capital gains taxes on those payments.

Step-by-Step Process for Setting Up a Structured Installment Sale

There are several steps to setting up a commercial property transaction through a structured installment sale.

First, the seller and purchaser must agree to break up the selling price into multiple installment payments over several years. The parties may execute an installment agreement as part of the sale transaction documents to outline the periodic payments.

Next, the buyer transfers their payment obligation under the installment agreement to an assignment company, which purchases an annuity to cover the installment payments. The insurance company then makes scheduled payments from the annuity to the seller.

Who Should Consider a Structured Installment Sale?

People in many different situations might benefit from using a structured installment sale to sell their real estate holdings, such as:

• Commercial property owners who want to avoid the restrictions of 1031 exchanges or the complexities of other tax-deferral strategies
• Property owners who wish to use their assets to fund their retirement
• Owners who need a long-term income stream for various reasons, such as to cover mortgage costs on a new investment property
• Owners who do not need immediate liquidity from the sale of their property

How Structured Installment Sales Support Retirement or Long-Term Income Goals

Because structured installment sales pay you the proceeds from selling your commercial real estate over a multi-year period, you can receive installment payments that may provide steady income to supplement retirement.

Structured installment sales can also support other long-term financial goals. For example, you can use the payments from a structured installment sale to cover the mortgage on a new investment property or to invest in other opportunities, allowing you to manage and potentially defer capital gains taxes from selling one property while reinvesting the wealth built in a prior commercial property.

Benefits of Using a Structured Installment Sale When Selling Commercial Real Estate

Some benefits of a commercial real estate installment sale include:

• Deferring capital gains taxes: Structured installment sales allow commercial property owners to spread their capital gains tax liability from real estate sales over multiple years, helping mitigate the overall tax burden.
• Reducing risk of non-payment: Unlike a traditional installment sale, in which a seller bears the risk of the buyer defaulting on their payment obligations, a structured installment sale reduces the risk of non-payment by having payments backed by an annuity from a trusted insurance company.
• Avoiding 1031 exchange restrictions: Structured installment sales do not have the various rules and restrictions of 1031 exchanges, such as the requirement to reinvest sale proceeds in a like-kind property or the strict timing restrictions.
• Gaining a long-term income stream: A structured installment sale can provide a commercial property seller with a dependable income stream that can potentially last for years.

Common Mistakes to Avoid in Structured Installment Sales

Here are some potential missteps to avoid when planning a structured installment sale for appreciated assets:

• Taking constructive receipt of the sale proceeds: If you have or exercise any control over the sale proceeds at any point, the IRS may charge you with the full capital gains tax bill from the sale.
• Choosing the wrong annuity company: Stay away from insurance companies that have poor credit ratings or show signs of financial instability. You could lose future payments if the company becomes insolvent, files for bankruptcy, or otherwise defaults on the annuity payments.
• Failing to report interest income: The annuity may pay both principal and interest on the purchase price. The property seller must also report the interest income they receive from the annuity and pay applicable taxes.

Reach Out to Our Team for Guidance on Tax-Efficient Options for Selling Your Commercial Property

Selling highly appreciated real estate while managing potential tax implications is a priority for many commercial property owners. At 453 Trust Powered by Pennington Law, we can discuss how a structured installment sale might help you make the most of your upcoming sale. Call or contact us today for a free, no-obligation consultation with a member of our legal team.