If you are seeking a steady source of long-term income and a way to optimize your tax liability, it is time to explore structured installment sales.
Structured Installment Sales Defined
At its core, a structured installment sale is an income preservation tool and tax reduction strategy. The seller agrees to receive the profit from the sale of a capital asset in installments vs. a cash lump sum. Examples of capital assets include business practices, personal real estate, and commercial real estate.
The buyer also benefits from a structured installment sale transaction. The payment is made to a third-party assignment company, which assumes liability for future payments. The buyer can finalize the transaction on their end.
A Guaranteed Source of Long-Term Income
For sellers, funding a structured installment sale with a fixed annuity offers a reliable source of long-term income. Rather than trying to preserve a large lump sum of cash, the seller enjoys a steady stream of payments spread out over time. This can be especially advantageous for retirees or individuals seeking to supplement their income without worrying about market fluctuations.
Sellers with more financial flexibility may want to utilize a market-based structured settlement. Funding a structured installment sale with a market-based structure can potentially provide higher returns while still allowing for tax-deferred payments. Additionally, sellers can combine a fixed annuity with a market-based annuity to balance guaranteed1 income with growth potential.
Tax Benefits: Capital Gains Deferral and Potential Reduction
Current tax laws require that the profit from the sale of a capital asset be reported in the year the sale occurs. One of the standout advantages of structured installment sales is their potential to minimize or potentially eliminate capital gains taxes.
Tax rates for long-term capital gains depend on the seller’s income. A large lump sum payment could bump the seller into a higher tax bracket. Conversely, accepting payment in installments could help the seller remain in a lower tax bracket, therefore reducing or eliminating capital gains tax liability. There is also the potential to eliminate net investment income tax (NIIT) if the seller’s income remains below a certain threshold.
Making Financial Growth Attainable
At Sage Settlement Consulting, we are advocates for individualized financial strategies that meet the needs of our clients. Our team believes every financial decision should be well-calculated and strategically aligned with your goals. Structured installment sales align perfectly with this philosophy, offering a path to lasting, tax-advantaged income.
The key to making the most of this strategy lies in partnering with an experienced financial professional to guide you through the process before the sales transaction is finalized.
For more information, contact your Sage consultant today.
1 Guaranteed payments are subject to the claims-paying abilities of the issuing insurance company.