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When you use a SCIN and your business is a cash basis taxpayer, you can spread any gain on the sale of your business over the term of the SCIN. This allows you to avoid a large tax liability in the year of the sale.
If your family buyer resells the business interest within two years, you lose the right to spread your gain on the sale. Rather, you will immediately owe income tax on the full amount of your gain. This rule doesn’t apply when your buyer is an unrelated party.
If you die before receiving all of your installment payments, tax may be owed on the unrecognized gain. The courts have not been in agreement as to whether the taxable event is reportable on your final income tax return or your estate’s income tax return. Nevertheless, there is a possible income tax or estate tax liability.