How an SIS Works
Mechanics, the four parties, the deal chronology, and the taxation of each payment.
An SIS has four players. You (the seller) agree to be paid over time. At closing the buyer hands the full price to an assignment company and walks away. The assignment company buys an annuity from a strong life insurer, and that insurer sends you the guaranteed payments on the schedule you designed. You report the gain bit by bit on Form 6252 — and each payment is part tax-free basis, part capital gain, and part ordinary-income interest.
The four parties
| Party | What they do | Key point |
|---|---|---|
| Seller | Sells a qualifying capital asset; negotiates installment language into the agreement; elects the installment method and files Form 6252. | Receives guaranteed income; reports gain over time. |
| Buyer | Buys the asset; agrees to deferred-payment language; pays the price to the assignment company at closing. | Released from any ongoing obligation after funding. |
| Assignment company | A non-insurance entity that accepts the buyer's obligation through a non-qualified assignment and funds it with an annuity. | Isolates the seller from buyer credit risk; not a life-insurer for §453B(e). |
| Life insurer | Issues the annuity funding the payments (e.g. MetLife / Metropolitan Tower Life; Independent Life). | Its claims-paying ability backs the income stream. |
The ten-step deal chronology
The defining requirement: the installment structure must be in place before the seller has any right to the cash — otherwise the seller is in constructive receipt and the deferral collapses.
- Negotiate the sale and agree that at least one payment will be received after the close of the tax year of sale.
- Engage an SIS specialist and the seller's tax advisor; design the payment schedule.
- Insert installment-sale language (an addendum) into the purchase agreement before closing.
- Assign the buyer's future-payment obligation to the assignment company in the documents.
- Buyer funds at closing — paying the assignment company rather than the seller.
- Assignment company accepts the obligation via a non-qualified assignment agreement.
- Assignment company purchases an annuity from a highly rated life insurer sized to the schedule.
- Title transfers; the seller receives any agreed lump-sum portion (taxable in the year of sale).
- Insurer pays the seller the scheduled periodic payments for the chosen term.
- Seller reports gain annually on Form 6252 under the installment method.
The non-qualified assignment & constructive receipt
Two doctrines must be respected for installment treatment to survive:
- Constructive receipt. The seller must not have the present right to the full proceeds — payment rights must be nontransferable and irrevocable.
- Economic-benefit doctrine. The seller must not own, or have a secured interest in, the annuity itself; the annuity is owned by the assignment company.
Genuine illiquidity is the price of deferral. Because the seller cannot reach the principal, the seller also cannot pledge the payment rights as loan collateral — doing so triggers immediate gain under the §453A(d) pledge rule and is the hallmark of the abusive "monetized installment sale" the IRS targets.
Three-component taxation of each payment
| Component | How it is computed | Tax treatment |
|---|---|---|
| Return of basis | Payment principal × (1 − GPP) | Tax-free recovery of adjusted cost. |
| Capital gain | Payment principal × GPP | Long-term rates (0/15/20%); 25% on unrecaptured §1250 gain. |
| Interest / earnings | Per the annuity / agreement | Ordinary income at the seller's marginal rate. |
Sale $1,000,000; basis $200,000; payments of $100,000/yr for 10 years plus $8,000/yr interest. Gross profit $800,000; contract price $1,000,000; GPP = 80%. Each year: $20,000 tax-free basis, $80,000 capital gain (LTCG), $8,000 interest (ordinary). If the asset included $150,000 of §1245 depreciation, that $150,000 is ordinary income entirely in year 1 and the GPP is recomputed on the remaining gain.
Payment-design flexibility
Within the constraint of irrevocability at closing, the schedule can be engineered to the seller's goals: a lump sum at closing for part of the proceeds; a deferred start (payments beginning in year 2, 3, or later); stepped/increasing payments to offset inflation; balloon payments timed to future needs; lifetime (mortality-based) or fixed-term schedules with remaining payments passing to beneficiaries; and index-linked growth with a downside floor.
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