Structured sales tax problems
Investors have recently begun exploring the concept of a “structured sale” as a way to defer taxes without the limitations of finding a replacement property. This article looks at what structured sales tax issues to consider with this new twist on homeowner financing and installment sales of real estate.
Many real estate investors have tried a 1031 exchange as a real estate repositioning or exit strategy. But, they have often been frustrated because they can’t seem to find a suitable replacement property. Investors have recently been introduced to the concept of a “structured sale” as an alternative 1031 means to defer taxes without the problem of replacement property. That is great potential news for many investors. The question is: will the IRS share your enthusiasm? We will try to answer this question by looking at the concept of a structured sale through the eyes of the IRS.
First, a structured sale, while a new term, is not necessarily a new concept. In essence, it is a combination of two long-standing IRS codes: installment sales and structured settlements.
Under an installment sale, section 453 of the IRS code has allowed a taxpayer to arrange the sale of a property so that the proceeds are taxable as received for several years, without fear that the flow of payments will be speed up and are taxed in the year. selling.
The “structured settlement”, and indeed the entire structured settlement industry, was created in the 1970s due to the rulings of the Internal Revenue Service. These rulings made it clear that periodic payments to claimants in personal physical injury cases were exempt from federal taxes as long as certain conditions were met. This recognition from the IRS made popular the concept of using periodic payments to help injured parties and defendants resolve claims. Prior to this time, the common law of the United States promoted the payment of a lump sum to claimants.
Listed below are the structured sales tax problems that had to be overcome when trying to combine these two separate concepts into this new unified concept.
The first basic point is that, under the “structured sale” technique, the buyer cannot be exempted from liability in the transaction. In other words, the IRS is saying that when the buyer “assigns” his payment obligation to a third party in the structured sale agreement, this assignment cannot alter or affect the terms of the buyer’s original obligation. The IRS will seek that the sole effect of the assignment under the suggested structured sale agreement is to impose a payment obligation on the third party that is in addition to, not in lieu of, the buyer’s original payment obligation under the agreement.
Next, structured selling cannot be at odds with the “constructive receipt” or “financial benefit” doctrines.
In this context, the constructive receipt and the economic benefit can be simplified to mean that if the seller has access (of any similar rights) to the funds, then they are subject to tax at that time. Section 453 of the IRS Code has very specific rules on this and as long as they are followed, the taxpayer should have no problem. The question is: does the addition of the structured settlement function of the assignment of the buyer’s obligations to a third party to make payments to the seller change this dynamic? Here is a summary of the problem to be aware of in this regard:
Under traditional principles of constructive receipt, if payments are not credited to a seller’s account, set aside for him, or otherwise made available for him to use the deal at any time, there is no implicit receipt. Therefore, if a buyer assigns the obligation to pay periodic payments to a seller, the seller should not experience any acceleration of profit. The essential point is that the assignment by the buyer of his payment obligation to a third-party assignment company cannot give the seller more rights than he had under the installment agreement. Therefore, in a structured sale, the third party’s payments must remain unsecured and not replace the buyer’s responsibility for making periodic payments. If the buyer was already bound by an installment agreement under which payments are taxable only in the year in which they were received, receipt of payments by the buyer from a third party (whose ability to make those payments not guaranteed) should not change the seller’s tax position.
From a profit perspective, the problem is that the structured sale can do nothing to alter the series of events that were first set when the seller negotiated the installment payments. Installment payments must remain the same, the interest rate must remain the same, and the original debtor must continue to be obligated under the note. The only thing that can change, and that cannot be changed through documents in which the seller is a party, is that the assignment of its obligations by the buyer produces an additional obligee and guarantor.
What all of this seems to be saying is that while a structured sale [http://www.nocapitalgains.info] plays by the same rules as installment sales, the concept of adding the allocation function from the world of structured settlement should work. As with everything legal and everything related to taxes, it is recommended that a professional handle your situation with many letters after your name.