Structured Installment Sale Pros and Cons: Is It Safe?
A structured installment sale spreads the tax on a sale by paying you over time, and a highly rated life insurer funds the payments, so you are not waiting on the buyer. It fits some sellers and not others: the schedule is generally fixed, it has to be arranged before closing, and it does not defer every kind of gain.
The quick answer
It usually fits better if…
- You want predictable payments and you are ready to stop owning the asset
- You do not want the buyer to be the one who owes you
- You are selling real estate, farmland, or a business that qualifies
- You can put the paperwork in place before closing
It usually fits poorly if…
- The sale has already closed, or you can already take the money
- You need to be able to cash the payments in whenever you want
- You are selling inventory or property you hold for sale to customers
- You want the proceeds invested for market growth
If you want the definition and the legal foundation first, start with what a structured installment sale is. This page is the evaluation: the pros and cons, whether it is safe, and how to set one up before closing. It is not a substitute for advice from your CPA or attorney.
How a structured installment sale works in 4 steps
The installment method under IRC §453 lets you report gain as you receive payments, when at least one payment comes after the year of the sale. A structured installment sale uses that method and moves the payment obligation off the buyer before you have the right to the funds.
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1Agree on the terms in the purchase contract
You and the buyer agree on any cash at closing and on the payment schedule. The contract has to allow the structured portion to be assigned. That language has to be in place before you have an unrestricted right to the money.
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2The buyer pays the full price at closing
The buyer pays in full, with cash or with the buyer's own financing. From the buyer's side, it looks like a cash closing. You are not carrying a note for the buyer to pay down over the years.
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3An assignment company and an insurer take on the payments
The structured portion goes to an assignment company, which takes on the obligation to pay you and funds that obligation with a highly rated life insurer. You do not deposit that portion in your own account.
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4You receive scheduled payments and pay tax as they arrive
Each payment is partly a return of your basis, partly taxable gain, and it can include interest. You report the sale on Form 6252. The tax follows the payments instead of landing all in the year of sale. IRS Publication 537 explains installment reporting.
Pros and cons
Pros
- The tax is spread out. Gain is taxed as payments arrive, instead of all in the year you sell.
- No buyer default risk. The buyer pays at closing. Your later payments do not depend on the buyer keeping a promise.
- Payments are fixed and predictable. You choose the schedule before closing, and you can plan around it.
- It works for real estate, farmland, and many businesses. It is not limited to property you could exchange under section 1031.
- No reinvestment deadline. After it is set up, you do not have 45 days or 180 days to buy something else.
- The schedule can be customized. A deferred start, level payments, and lump sums along the way are design choices you make up front.
- You can name beneficiaries. Scheduled payments can continue to the people you name if you die during the term.
Cons
- It must be set up before closing. Once you have the right to the proceeds, that money cannot be structured.
- Payments are generally fixed. You usually cannot speed them up or cash them out because you changed your mind.
- No market upside. The proceeds are not invested for growth. If markets rise, these payments do not rise with them.
- Recapture is not deferred. Under IRC §453(i), depreciation recapture on personal property is taxed in the year of sale.
- Dealer property and inventory do not qualify. The installment method is not available for those sales.
- You depend on the insurer. The payments are only as strong as the life insurer that funds them.
- Inflation erodes fixed payments. A payment that feels comfortable now buys less in later years.
Is a structured installment sale safe?
Safety here means whether the payments show up, and whether the tax treatment holds. Those are different questions.
On the payments: a highly rated life insurer funds them, not the buyer and not the stock market. "Highly rated" is a starting point, not a guarantee. Before you close, ask which insurer will fund the payments and look up its financial strength rating yourself. AM Best and S&P Global Ratings publish those opinions. Ratings change.
If an insurer fails, your state's life and health insurance guaranty association may provide a backstop. Coverage, dollar caps, and which contracts qualify vary by state, and a stream of payments from a sale is not automatically treated like a personal life insurance policy. The National Organization of Life and Health Insurance Guaranty Associations is the place to find your state's association. Do not assume a dollar amount of protection. Confirm it for your state and your contract.
On the tax: installment reporting is a long-standing rule in section 453, not a private letter ruling for one product. It holds when the arrangement really is an installment sale and you did not have constructive receipt of the funds. Arrangements that lend the money back to you are a different thing, and the IRS has treated some of those as abusive. Your CPA should read the documents before you sign.
What it does not defer. Depreciation recapture on equipment and other personal property is taxed in the year of sale under section 453(i). Inventory, and property you hold mainly for sale to customers, generally cannot use the installment method at all.
Who it fits, and who should look elsewhere
It tends to fit a landlord, farm owner, or business owner who wants to be done with the asset, wants payments they can plan around, and can arrange the paperwork before closing. The same person might still choose a 1031 exchange if they want to keep owning real estate, or seller financing if they want to earn interest from a buyer they trust and can handle a default.
It tends to fit poorly if the closing already happened, if you need the money to be liquid, if you are selling inventory or dealer property, or if most of what you care about is growth on the proceeds. A fixed schedule is a feature when you want income. It is a drawback when you want flexibility.
Setup checklist
Start before you sign the purchase contract if you can, and at least well before closing. People to involve: your CPA, your attorney, the title or escrow company, and a structured sale consultant. The steps below are the practical order. Your deal may add details. It will not subtract the "before closing" rule.
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Involve your CPA, attorney, and consultant early
Talk with your CPA, a real estate or business attorney, and a structured sale consultant before you sign the purchase contract if you can, and at least well before closing. There is no single legal number of days. The contract, the assignment paperwork, and the payment illustration all have to be finished before you can take the money.
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Put the payment terms in the contract
Agree on the schedule, including any cash you will take at closing, and put language in the purchase contract that assigns the structured portion before you have the right to those funds.
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Close with the buyer paying in full
At closing, the buyer pays the full price. The structured portion goes to an assignment company, which takes on the payment obligation and funds it with a highly rated life insurer. You do not take that portion into your own account.
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Receive payments and report them
You receive the scheduled payments. You pay tax on the gain portion as each payment arrives, generally reporting the sale on IRS Form 6252. Your CPA prepares that return.
Newer structured installment sale products
The new structured installment sale products that provide greater flexibility can loosen how rigid the schedule is. Before you choose one, ask what you can change after closing, what you cannot change, which insurer funds the payments, and what the written illustration shows for the amount assigned and the payments you would receive. Take those answers from the documents.
Frequently asked questions
Can I do this after closing?
No. A structured installment sale has to be set up before closing, and before you have the right to the money. If the proceeds are already yours, or available to you, installment treatment for that money is no longer available. Talk with your CPA and a structured sale consultant before you sign, or at least well before closing.
What if the insurer fails?
The payments depend on the financial strength of the life insurer that funds them. If that insurer fails, a state life and health insurance guaranty association may provide a backstop. Coverage, dollar caps, and which contracts qualify vary by state, and a payment stream from a sale is not automatically covered the same way a personal policy is. Check your state's association, and check the insurer's ratings, before you rely on either one.
Can I change the schedule later?
Generally, no. The schedule is fixed when the sale closes, and speeding it up or cashing it out can accelerate the tax. Ask, before you choose, what can be changed later. The new structured installment sale products that provide greater flexibility are the ones to ask that question about.
How long can payments run?
The tax code does not set a single maximum. Schedules can be designed for a term of years, with a deferred start, with lump sums along the way, or for life, depending on what is available when you set the sale up. Ask for the schedules you can actually choose, in writing, before you close.
What's the minimum sale size?
The tax code does not set a minimum sale price for installment treatment. Whether a particular sale is large enough is a practical question for the assignment company and the insurer. Ask before you spend time designing a schedule.
Does my buyer have to agree?
The buyer pays the full price at closing, as in a cash sale. The purchase contract needs language that lets the payment obligation be assigned. A buyer who is paying cash, or using a lender, can usually agree to that. It has to be in the contract before closing, so raise it early.
What does it cost me?
You typically do not write a separate fee check. The cost is inside the price of the payment stream: the amount assigned at closing buys a schedule of payments. Ask for a written illustration that shows the amount assigned and the payments you would receive, and compare that with taking the cash. Fees and the payment rate vary, so this page does not quote a percentage.
Does my CPA need to be involved?
Yes. Your CPA reports the installment sale, usually on Form 6252, and has to be comfortable with the timing before you close. An attorney should review the contract. A structured sale consultant coordinates the payment schedule with both of them. This page is general education, not a substitute for that advice.
Sean Whitehead
Sean is a structured settlement consultant and runs StructuredSales.org. He helps landlords, farm owners, and business owners see whether a structured installment sale fits their sale, and works with their CPA, attorney, and closing team to get it set up before closing.
Related reading
Sources
- 26 U.S.C. §453, installment method, including §453(i) on recapture. Cornell Law Institute.
- IRS Publication 537, Installment Sales.
- IRS, About Form 6252, Installment Sale Income.
- National Organization of Life and Health Insurance Guaranty Associations. Coverage limits vary by state.
Want a second set of eyes before you close?
Tell me what you are selling and when you expect to close. I will walk through whether a structured installment sale fits, at no cost, and you can take that to your CPA.
Or call Sean directly: (330) 540-0200