Structured Installment Sale Real Estate-MetLife
Real Estate
Selling a real estate property is a great opportunity to adjust your financial portfolio. However, a sale can have tax implications as well. If you receive the sale proceeds in one lump sum, you might face not only significant capital gains taxes, but also significant net investment income taxes and state income taxes, which are generally due in the year of the sale.1
To help defer all or a portion of capital gains, you have the option to turn the proceeds of your property sale into a protected stream of income.2 This means you will only have to pay taxes on the income payments in the year they are received, which will defer and may decrease the total taxes on the sale. This solution is called a Structured Installment Sale.
A case example
Mary is 48 years old and wants to reduce her real estate holdings, so she decides to sell her childhood home in Florida. Upon putting it on the market, she accepted an offer of $4,250,000. The property’s adjusted basis is $1,900,000 and the selling expenses associated with the transaction are $200,000 resulting in a gain of $2,150,000. The property is not subject to a mortgage.
During the sales process, Mary consulted with her legal, tax and financial advisors who advised that a Structured Installment Sale would be beneficial. This solution would reduce associated capital gain and net investment income taxes while providing periodic payments to supplement her retirement income. Additionally, Mary’s tax advisor mentions that taxes attributable to the sale would be reduced due to $100,000 of realized long-term capital losses within her investment portfolio.
As outlined in the Purchase and Sale agreement, the $4,250,000 purchase would be payable as follows: upfront cash of $600,000 this year with the remaining $3,650,000 payable in 15 equal amounts beginning next year.
Comparing options: Structured Installment Sale vs. Lump Sum
If Mary had received the proceeds in full at the time of the sale, she would have to pay close to $370,582 in capital gain taxes (at a marginal 20% federal capital gains rate) and another $68,400 due to the 3.8% net investment income tax. Since Mary is a resident of Florida, she isn’t subject to state income taxes.
By choosing a Structured Installment Sale, she will pay approximately $12,988.50 in taxes this year (taking advantage of the 0% and 15% capital gains tax rates) and about $22,450 in taxes annually for the following 15 years. By spreading the gain over a period of years, she will avoid net investment income taxes altogether. This results in a tax savings of over $89,000.* The savings is also due to the tax rules applicable to installment sales which generally provide that each installment payment, which comprises a return of basis, capital gain and interest (with the interest taxed as ordinary income), will be taxable over time when paid to the seller. As a result, Mary was able to manage her annual taxable income and leverage lower tax brackets.
By using a Structured Installment Sale, Mary reduced her tax bill, preserved more of the sales proceeds, and benefits from a 15 year income stream.
How was Mary’s capital gain calculated?
The taxes were computed by first determining the amount of gross profit (none of which is subject to depreciation recapture rules): Selling price of $4,250,000 less adjusted basis (including expenses of the sale) of $2,100,000 equals a gross profit of $2,150,000. The gross profit factor is 50.59% ($2,150,000 gross profit divided by $4,250,000 contract price).
In the year of the sale, Mary received only the down payment of $600,000. In applying the gross profit factor of 50.59%, Mary must report $303,540 of capital gain income, which will be offset by her $100,000 long term capital losses for a net long-term capital gain of $203,540. This results in about $12,988.50 of capital gains taxes and $0 net investment income tax.
For the fifteen years following the year of the sale, Mary receives $337,002 per year . In applying the gross profit factor of 50.59% to $243,000 ($3,650,000/15), Mary must report $123,102.33 of capital gain income and $93,669 ($337,002 -$243,333) of ordinary income. resulting in about $22,450 of taxes annually during this period and $0 of net investment income tax.
Tax computations assume: Mary’s filing status is married filing joint; no additional income; applicable standard deduction is $27,700; the real estate was held over one year and is deemed a capital asset; no state income taxes; 2023 federal individual income tax rates apply for the life of the arrangement.
This example is hypothetical in nature and actual results will vary. For further information about the federal tax treatment of installment sales, see IRS publication 537 at www.irs.gov.
How does a Structured Installment Sale work?
Instead of receiving one lump sum, all parties agree to periodic payments for a stated number of years as a condition of the property sale. The periodic payment obligation is then transferred to MetLife Assignment Company, Inc. (MACI) by the Buyer, who pays the full premium to cover the payments. MACI takes the Buyer’s premium check for the periodic payments and purchases an annuity from Metropolitan Tower Life Insurance Company (Met Tower Life). Met Tower Life would then issue the scheduled payments to the Seller on behalf of MACI. Both entities are wholly owned, U.S. based subsidiaries of MetLife, Inc. and, as such provide great confidence for all parties.
The Met Tower Life Advantage
The Structured Installment Sale is provided by Metropolitan Tower Life Insurance Company, (Met Tower Life), an insurance industry leader and a leader in the structured settlement market. Met Tower Life holds an A+ rating from A.M. Best, an Aa3 rating with Moody’s, an AA- with Fitch and an AA- with Standard & Poor’s. The promise of financial security is only as solid as the company making the guarantee. When you select our annuity, you are choosing a leader who will partner with you every step of the way and can provide you with a steady, dependable income stream — both now and in the future.3
