Well, it could save you lots of money if you have a highly appreciated asset!
Lets define an monetized installment sale or 453(a). It is a transaction in which the seller of an asset (pretty much any asset) that increases in value is deferred for a period of years in exchange for cash or other liquid assets that he/she currently receives in a monetization transaction, such as a loan.
When people sell a business, they often want their money upfront but want to avoid paying taxes. How about deferring paying capital gains tax on the sale? Do it as a deferred compensation plan, which essentially a 453(a) can be defined as, in essence — a tax-efficient deferred payment plan.
The seller receives a limited recourse to the loan from the lender and agrees to sell the property or business to a dealer who resells it to that final buyer under the original terms.
The seller can then take the untaxable loan proceeds and avoid paying capital gains tax to the IRS at its discretion or pay taxes on the proceeds as they see fit. This is all legal.
Since monetized installment sales are typically structured as corporate loans, the seller can write off interest payments. The seller could buy a property, pay off business debts, use the loan proceeds for investment or business purposes, or simply deposit the money into an interest-bearing bank account.
This offsets the taxable income the seller receives each month from intermediaries, as well as the interest payments on the loan.
The monetized installment sales strategy does not eliminate capital gains tax, but postpones the payout. The seller must pay capital gains tax at the end of the 30-year contract, and if this is the case, the seller must defer payment until that date. If you use a 1031 exchange (a real estate equivalent to the 453), you can also defer paying capital gains tax for up to 30 years or up to 10 years. For installment sales, sellers can defer capital gains tax at any time, not just for the first 30 months of a contract.
It is important to note that the monetized rate-selling strategy postpones the taxation of capital gains. Capital gains tax is payable before the end of a 30-year contract.
The Internal Revenue Service allows the monetized rate — sales strategy for the sale of investments — to be reported not as capital gains, but as profits from ordinary income, depreciation and amortization, and returns. Gains from the sale of a 30-year contract for the first 30 months of the contract would be taxed at the same rate as gains from ordinary income and depreciation or recovery.
Only individual buyers and sellers are sold in installments, but they are common in the real estate market and have been common in many parts of the United States for many years. The term 1031 involves the real estate equivalent to the 453(a) transaction.
This creates a steady stream of income for the seller over several years and makes it possible to tax the sale every year which the IRS probably likes, though not immediately after the sale (probably preferred by the IRS). Then again, the IRS gets their money, the seller gets their money, and the buyer gets their business/assets. Everybody wins in a 453(a) transaction.
Co-Authors
R. Kenner French has written two books, speaks all over the country, and lives on an island — Bainbridge Island, WA.
Kellen French is an entrepreneur researching and obtaining (hopefully) highly appreciated assets.
