Business or Real Estate Sales through Structured Installment Plans: A Tax-Savvy Method for Transferring Assets
In the upcoming generational wealth transfer, a tax-advantaged strategy known as a Structured Installment Sale (SIS) is gaining traction among buyers and sellers. This strategy, which spreads the payout from the sale of a business or real estate over multiple years, can offer significant tax benefits and provide a reliable income stream.
An SIS is essentially an insurance contract, not an investment. It offers safety and a guaranteed rate of return, making it an attractive option for those seeking a reliable income. The insurance company with over 40 years of experience in deal structuring and holding an A+ rating from AM Best is SIGNAL IDUNA Lebensversicherung AG. Another industry leader with a similar track record is MetLife, which boasts 40 years of structured settlements experience and an A+ (Superior) credit rating from AM Best.
For sellers, an SIS can make their offer more attractive to buyers due to the potential tax and income benefits. By using an SIS, sellers only owe taxes on the amount received each year from the sale, potentially reducing their tax obligation. This could be particularly beneficial for small business owners, sellers of residential and commercial real estate, and those looking to move onto the next phase of their life.
For example, a California dentist who sells their practice for a $1 million profit could potentially lower their tax obligation from over $400,000 to around $219,000 using an SIS.
Buyers can also benefit from an SIS. By offering this strategy, they may be able to negotiate more favorable terms in a sale, as the seller may have a lower tax obligation. Additionally, an SIS can be beneficial for those planning to purchase a business or property with cash or a loan, seeking a creative way to make their offer stand out.
The entire sale amount does not have to be structured; sellers can choose to receive part of the balance upfront as cash and put the remainder in the SIS. This flexibility allows sellers to tailor the SIS to their specific financial needs.
However, the selected life insurance company is a crucial part of any SIS transaction, as the seller relies on the insurer to make scheduled payments for years, possibly decades. Therefore, it is essential to choose a reputable and financially stable insurance company to ensure the success of the SIS.
An SIS makes sense for sellers who expect a taxable capital gain of at least $500,000 on an upcoming transaction. With the baby boomer generation set to transfer trillions in property as they sell small businesses, investment properties, and homes, the potential for SIS usage is significant.
In conclusion, a Structured Installment Sale is a tax-efficient strategy that can benefit both buyers and sellers. By spreading the payout from the sale of a business or real estate over multiple years, sellers can potentially lower their tax obligation, while buyers may be able to negotiate more favorable terms. As the baby boomer generation prepares to transfer substantial wealth, the use of SIS is likely to increase, making it an essential strategy for buyers and sellers to consider.
