Implementation Checklist / Setup Guide
A practical path from eligibility check to ongoing reporting — plus due diligence and red flags.
Setting up an SIS is methodical. Confirm the asset qualifies, assemble your team, model the tax both ways, write the installment language into the purchase agreement before you have any right to the cash, design the schedule, execute the non-qualified assignment, fund the annuity, close and transfer title, then file Form 6252 every year.
Step-by-step setup
- Confirm eligibility. Verify §453 applies; identify any §1245/§1250 recapture and related-party issues.
- Assemble the team. An SIS specialist, the seller's CPA or tax attorney, and the closing/escrow agent.
- Model the tax. Run lump-sum vs. SIS under realistic income projections; quantify NIIT, interest, and any §453A charge.
- Structure the purchase agreement. Insert installment-sale language before the seller has any right to proceeds.
- Design the schedule. Choose term, start date, and any lump-sum portion, step-ups, balloons, or lifetime income.
- Execute the non-qualified assignment. Payment rights are nontransferable, irrevocable, and unpledgeable.
- Fund the annuity. The assignment company buys an annuity from a highly rated (A+/A++) insurer.
- Close & transfer title. The seller receives any agreed closing lump sum (taxable that year).
- Begin payments. The insurer pays on schedule.
- Report annually. File Form 6252 each year; track the GPP and any §453A charge.
Due-diligence checklist
- Confirm the asset qualifies; identify all §1245/§1250 recapture and related-party issues.
- Assess whether §453A applies (price > $150K and obligations > $5M); check farming/personal-use exemptions.
- Model current-year tax under both scenarios; project income across the SIS period; quantify NIIT and ordinary tax on interest.
- Execute the installment addendum before closing; select a highly rated insurer (A+/A++); review rate, schedule, beneficiaries.
- Confirm buyer cooperation; decide partial vs. full SIS; retain adequate liquidity; no pledging language.
- File Form 6252 annually; monitor the §453A calculation; retain cost, improvement, and depreciation records.
Distinguish a legitimate SIS from a monetized installment sale. A genuine SIS accepts real illiquidity. Avoid: late structuring (installment language after the seller can demand cash); pledging the obligation as collateral; ignoring recapture; a weak carrier or over-concentration; and attempting an SIS for an unqualified asset.