What's up everybody? Well, the sun is shining here in the SLC and I would really like to get a bike ride in but...I have a lot going on today + my bike needs to be tuned. Anyway, today's post will probably benefit real estate developers, investors, land holders better than anyone else. Less focused on green ideas and initiatives and more focused on business transactions and tax ramifications. The topic is structured sales (Wikipedia has a good little explanation).
Anyway, I have seen structured sales mentioned in a couple different articles recently and thought that I would dig a little deeper and then feature it in a post. Basically, a structured sale is a tax deferral strategy. The idea being that if you sell a piece of real estate today, you would likely pay tax on the difference between your sales price and your purchase price (i.e., you sell capital gain property for $1,000,000 but you bought it for $500,000...your capital gains tax is 15% x $500,000 or $75,000). But let's say that you don't really need the money from the sale to roll into another real estate deal...or you just want to defer the paying of any taxes. Enter structured sale. Similar to an installment sale. With an installment sale, let's say you work out a deal with the buyer. He agrees to pay you $100,000 for 10 years (equaling the $1,000,000 sale price). Well, instead of recognizing $75,000 of tax in the first year...you end up spreading the tax bill over 10 years...recognizing a piece of it everytime you are paid the $100,000 from the buyer.
You see a lot of installment sale structures when you are selling a business...but what about real estate. One lot...one piece of land...one house. Well, enter structured sales. Structured sales differ from installment sales in that SS are usually backed by an insurance company (Allstate or Prudential) acting as a third party. The seller sells it to the insurance company...who in turn sells it to the buyer. The buyer pays the insurance company for it...in the meantime, the insurance company has set up the seller with an annuity based on agreed upon terms. Insurance companies are large and liquidenough to be able to set up structured sales...offering annuities to the seller, where individual buyers would be unable to do so. The market for structured sales right now is still small but it is growing.
There are some other nuances but that is the general idea. Pretty cool idea if you want to defer the tax. Structured sales have emerged in response to the IRS ending another popular tax-deferral strategy called a private annuity trust. If you would like more details on anything in today's post, shoot me an email.