Structured Settlements

Installment Sales

Individuals who sell their business or personal property at a gain are often faced with the dilemma of recognizing the gain immediately or deferring some or all the gain. Generally, the entire profit is taxable in the year of the sale. However, by making a sale in one tax year with part of the proceeds payable over the following tax year(s), an eligible seller recognizes the taxable gain in the tax year the installment payment is received or deemed received. Each payment received is treated as part non-taxable recovery of basis and part taxable gain. Such an arrangement is known as an “installment sale".

What is an Installment Sale?

An installment sale is a “disposition of property where at least one payment is to be received after the close of the taxable year in which the disposition occurs. Installment sales generally permit sellers to defer gain on certain property dispositions to the tax year in which the related sales proceeds are received.

Not all property dispositions where payments are received in later tax years qualify as installment sales (e.g. sales of inventory, sales by dealers in real and personal property, sales of securities traded on established exchanges, the portion of a sale of real or personal property that is subject to depreciation recapture and certain sales of property between related persons). Sellers should consult with their own independent tax advisor to see if a sale qualifies as an installment sale.

How do installment sales work?

In general, with respect to a typical sale of property eligible for an installment sale, the Seller and the Buyer agree that the Buyer will pay a certain amount of the purchase price through making at least one payment after the tax year of the sale. The Seller should consult with his or her own independent tax advisor to see if a sale qualifies as an installment sale. Each installment sale payment received by the Seller consists of the following three components:

How is the sale transaction structured?

Once the sales transaction is completed, the Buyer immediately assigns its periodic payment obligations to the Assignment Company. The assignment is effected through executing an Assignment of Obligation agreement. This assignment agreement between the Buyer and the Assignment Company makes no changes to the terms of any prior agreement between the Buyer and the Seller. The Buyer assigns to the Assignment Company the Buyer’s obligation to make the periodic payments as specified in the Assignment of Obligation agreement. The structured sale may appeal to the Seller who has concerns with relying on the credit quality of the Buyer.

What is the structured sale strategy?

In a structured sale strategy, a Seller agrees to take part of the funds from the sale of a business or property in the form of periodic payments from the Buyer, or what is commonly referred to as an installment sale.

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