Structured Installment Sales: a Tax-Efficient Way to Sell a Business or Real Estate

Selling a business or piece of real estate can trigger one of the largest tax bills of a person’s life. Whether that bill is for tens of thousands or for millions, sellers should consider tax-efficient options of receiving their sale proceeds before signing on the dotted line.

A structured installment sale (SIS) can help sellers defer and even potentially reduce their tax liability while creating a safe, reliable income stream for the rest of their lives, regardless of what’s happening in the stock market.

This tax-advantaged strategy can offer benefits to both sellers and buyers in today’s market conditions.

How a structured installment sale works

An SIS spreads the payout from the sale of a business or piece of real estate over a number of years to reduce the tax impact. A portion of the sales proceeds is used to fund the SIS. The life insurance company is then legally responsible for making the future payouts to the seller. The seller only owes taxes on the amount received each year from the respective sale, which may be considerably less than what’s owed on a single lump sum from a traditional sale.

Since the seller receives proceeds spread over multiple years, they may be able to bring themselves into a lower tax bracket, potentially reducing how much they owe for federal capital gains taxes, state income taxes, and the net investment income tax.

The entire amount doesn’t have to be structured. Sellers can choose to receive part of the balance upfront as cash and put the remainder in the SIS to defer taxes and generate income.

Structured installment sale example¹

For example, a California dentist sells their practice for a $1 million profit above costs. If they receive the entire payout at once, they will likely owe over $400,000 in taxes, a combination of federal capital gains, investment income tax, and state income taxes.

Alternatively, say the dentist and the buyer agree to an SIS that spreads the sale proceeds in annual payments over 20 years. Since each annual payment is substantially lower than the lump sum, the dentist can likely lower their tax obligation, while avoiding the net investment income tax altogether.

In this situation, a 20-year SIS likely trims the dentist's estimated tax bill to around $219,000, nearly half of what would be owed on a lump sum. For more specifics on this calculation, please see this detailed case study.

The bigger picture

The previous example isn’t just a one-off scenario. Over the next couple of decades, the baby boomer generation will transfer trillions in property as they sell small businesses, investment properties, and homes both to prepare for retirement and to pass property on to their heirs². Recent market trends have made tax deferral strategies more important than ever.

Home prices have risen nearly 50% over the last five years, according to the National Association of Realtors. Homeowners have likely accrued substantial gains. While homeowners can receive a portion of the federal gains tax-free for selling their primary residence, that exclusion hasn’t changed since the late 1990s: $250,000 for individuals, $500,000 for couples. Homeowners looking to move or downsize could see their net worth take a substantial hit from taxes.

Sellers of other properties or businesses don’t receive a personal exclusion at all, meaning their tax bill can be even larger. In all these cases, a structured installment sale can make a substantial difference for both sellers and buyers in this upcoming generational wealth transfer.

Benefits for sellers

Sellers facing a substantial taxable capital gain can benefit from an SIS in the following ways:

Lower total taxes. By deferring and spreading out the sale proceeds over time, sellers potentially reduce the annual tax hit on an asset sale and keep more in their pockets.

Guaranteed income. An SIS can be structured with guaranteed payments for a fixed number of years. This gives sellers a safe, reliable source of income for healthcare, travel, hobbies, and other bills.

Protection against market downturns. SIS payments are not tied to stock market performance, ensuring income stability even during downturns.

Competitive rates. The payments from an SIS are fixed and based on interest rates at the time of purchase. Since interest rates are near recent historical highs, it’s an opportunity for sellers to lock in competitive, guaranteed income payments for the future.

Benefits for buyers

An SIS can also provide a valuable bargaining and financial tool for buyers looking to acquire a business or piece of real estate for these reasons:

More attractive offers. Buyers can outline the substantial potential tax and income benefits of an SIS to a seller. This can make an offer stand out from other potential buyers, especially as these strategies are still relatively unknown and not commonly proposed.

Potential purchase discounts. Sellers who save considerably on taxes with an SIS may be willing to accept a lower offer as part of the negotiations, since they may end up with a better after-tax result even with a lower price.

No administrative duty for the buyer. After the SIS is purchased, the insurer takes over the administrative work and is responsible for making all future payments. If a buyer set up an installment sale on their own to help the seller reduce taxes, the buyer would be responsible for this ongoing obligation and risk for years after the deal.

Who should consider a Structured Installment Sale?

An SIS makes sense for sellers who expect to have a taxable capital gain of at least $500,000 on an upcoming transaction. This is the sweet spot where the tax efficiencies from an SIS can start to pay off.

Typical SIS sellers include:

Small business owners such as dentists, restaurant owners, veterinarians, insurance agents, and mechanics.

Sellers of residential real estate, including investment properties, vacation properties, and primary residences that generate a gain well above the personal exemption.

Sellers of commercial real estate, including apartment buildings, office space, gas stations, and farmland.

Sellers looking to move onto the next phase of their life whether that’s retiring or exiting their business or property.

On the buyer side, an SIS can make sense for someone planning to purchase a business or property with cash or through a loan, who is looking for a creative way to make their offer stand out.

Alternatives to a Structured Installment Sale

Both parties should consider all their options before signing the paperwork on any deal.

Sellers should keep in mind that an SIS is an insurance contract, not an investment. As a result, it provides safety and a reliable income, including a guaranteed rate of return.

There are also other tax-efficient strategies to structure deals that aren’t income-focused. For instance, a 1031 exchange allows a seller and buyer to swap pieces of investment real estate while deferring capital gains taxes.

Choosing the right SIS partner

The selected life insurance company is a crucial part of any SIS transaction. The seller will rely on the insurer to make the scheduled payments for years, possibly decades. That’s why it’s essential to work with a company with a proven track record and a strong credit rating from independent agencies, that rate insurers based on their financial ability to meet their obligations.

MetLife has 40 years of structured settlements experience and an A+ (Superior) credit rating from AM Best. It is a leader in the growing industry of structured installment sales.

If you are considering a future deal as a buyer or seller and believe that the benefits of an SIS could make sense, please visit MetLife’s website for videos, case studies, and FAQs at metlife.com/structuredsale To contact MetLife’s sales team, visit our Meet the Team page.

^{1 The capital gain taxes were computed by first determining the amount of gross profit (none of which is subject to depreciation recapture rules): Selling price of $2,500,000 less adjusted basis (including expenses of the sale) of $1,050,000 equals a gross profit of $1,450,000. The gross profit factor is 58% ($1,450,000 gross profit divided by $2,500,000 contract price). During the 20-year period starting in the year of the sale, Jose will receive $183,570 annually. In applying the gross profit factor of 58% to $125,000 of each payment ($2,500,000/20), the dentist must report $72,500 of capital gain income each year. This computation assumes the remaining $58,570 ($183,570 - $125,000) of each annual payment is taxable as interest. Annually, this results in about $5,383 of federal income taxes, $0 net investment income tax and about $5,568 of associated state income tax. Computational assumptions include: the dentist’s filing status is married filing joint and the standard deduction for federal purposes is $27,700; capital gain qualifies as long-term capital gain; sale property is eligible for installment sale treatment; no other income was factored into this example; 2023 federal and state income tax rates apply for the life of the arrangement.}

^{2 Cerulli Associates, “The Cerulli Report: U.S. High-Net-Worth and Ultra-High-Net-Worth Markets 2024,” December 5, 2024.}

^{Neither Metropolitan Tower Life Insurance Company, Lincoln, NE nor its affiliates offer tax or legal advice. Any discussion of taxes in this material is intended to be general in nature and based on our understanding of the tax laws as they currently apply. Tax laws are subject to change and to different interpretation. You should consult your own tax advisor to determine how the tax law applies to your situation.}

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