Disadvantages of the Structured Sale Strategy

I posted an article last week regarding the Structured Sale tax deferral strategy.  I received a number of private emails requesting more information, including more information about the potential downside and/or disadvantages of implementing a Structured Sale strategy.  These are great questions, of course, and an important part of your due diligence process. 

Disadvantages of the Structured Sale Strategy

The first (and major) disadvantage is that the Internal Revenue Service has not issued any guidance or rulings related to the Structured Sale at this point in time. 

The second is that Structured Sales are drafted pursuant to Section 453 of the Internal Revenue Code, which means that certain types of depreciation recapture are not deferred.  Essentially, excess depreciation taken over the straight line method of depreciation cannot be deferred and would be taxed in the year the real estate was sold.  This is just like an installment sale note or seller carry back note would be taxed.

Finally, any amount of mortgage pay-off in excess of your adjusted cost basis ("mortgage over basis") can not be deferred. 

Other Miscellaneous Disadvantages

The Structured Sale is a more complicated income tax structure than with other income tax planning strategies such as the 1031 exchange.  Taxpayers using the Structured Sale must follow the specific requirements imposed by Section 453 of the Treasury Regulations.  Fees to structure the Structured Sale are often much higher than other income tax planning strategies such as a 1031 exchange.