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176. Does an Installment Sale Defer the Tax on Recapture of Accelerated Depreciation? No. Can the Tax on Recapture of Accelerated Depreciation Nevertheless Be Deferred When an Installment Sale Occurs? Yes.
162. Transfer a Family Business to the Next Generation During the Parent's Lifetime, Retain an Asset for Income, Give the Transferee a Stepped-up Basis, Defer the Gain on Sale, Support the Parent with Deductible Rent, and Finance the Transaction, Too
April 7, 2011
Our Flagship Transaction
As our regular readers may know, S.Crow Collateral Corp.’s "flagship" transaction is the "collateralized installment sale", or "C453" for short (named after a section in the tax code). With C453, we buy capital assets of all kinds, for resale. The typical seller to S.Crow Collateral Corp. is one for whom the sale will produce considerable taxable gain, whether from appreciation in value, depreciated tax basis, or debt over basis. The asset may be unencumbered, or the owner may need or wish to de-leverage without adverse tax consequences. All of that works really, really well.
Our Flagship Relationship
What really sets C453 so far apart from—and so far ahead of—the competition is our flagship relationship. S.Crow Collateral Corp. now has a standing loan-commitment offer from a lender, pursuant to which our sellers can take full cash out of the deal but still defer the tax on the sale for many years.
Tax Deferral Stretching Long into the Future
The tax-deferral part is simple and has been in place since the very beginning of the U.S. income tax in 1913: the gain on installment sales is taxed when the principal purchase price is paid, not when the sale occurs. The tax code places no limit on how long the tax deferral can continue, and if the installment payments are interest-only, the tax on the capital gain can be entirely deferred until the end of the installment contract—10, 20, 30 or more years away.
Non-taxable Cash in Hand
The loan transaction is completely separate, and optional. With the loan proceeds, our seller has non-taxable borrowed money instead of taxable sale proceeds. Our seller may use the loan proceeds for any business or investment purpose, to retire business debt, or whatever.
Automatic Repayment, from Installment Payments Alone
S.Crow Collateral Corp.’s interest-only installment payments will fund all of our seller’s payments (also interest-only) on the loan through an automatic payment credit-and-debit process. S.Crow Collateral Corp.’s final principal payment will fund our seller’s final principal payment on the loan, through the same automatic credit-and-debit process. With that process in place, the lender agrees not to look to our seller’s other resources for repayment of either the loan interest or principal.
No Assets Are Encumbered
The lender is an affiliate of a mortgage lender with whom we have done business for many years, but these loans are not mortgage loans and are not limited to real-property transactions. The loan does not encumber any of the assets of our seller—not even the installment contract itself.
Timing, Sales Commission, Deal Size or Type
Please note: S.Crow Collateral Corp. purchases for immediate cash resale. For that reason:
1. If we buy, the closing of our purchase will not occur until the closing occurs for our resale;
2. If we buy, any broker’s or agent’s existing sales-commission listing will continue in place until the resale to a final buyer is in place, but the sales commission may increase because of the second sale;
3. We are indifferent about the type of property or the size of the deal (although installment sales of more than $5 million per selling owner require a further process not described here); and
4. We can execute the purchase contract before a final buyer is in place, or at any time before the closing of a sale to a final buyer, without, in either case, delaying, interfering with, or adversely affecting the final buyer. (In some instances, however, the final buyer’s after-tax, after-purchase position may be improved.)
If you want to sell, but you’re thinking that you will "just pay the tax", you need to re-think. Unless you intend to spend the sale proceeds immediately in riotous living, paying the tax now is hardly ever the wisest decision, regardless whether the current tax rate is high or low. That is because (1) your return on investment after the sale, if you defer the tax, should rise by more than the tax rate (for an explanation why that is so, call me), and (2) the tax liability is not adjusted for inflation, but will be paid maybe 10, 20 or 30 years from now in dollars that may be worth much less than they are today. The latter factor alone should far more than compensate for any future tax-rate increase.
Come on board our flagship. There’s still room for you.—Stan Crow
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The Latest Installment addresses situations, questions and issues which are brought to us in the course of the consideration, negotiation or execution of transactions. We don't use the real names of parties to transactions, and we may edit the statement of the question to try to tell the story better. Please feel free to comment, or to take issue, or to raise your own question or situation. If you do the latter, please do not relate any confidential information.
The Latest Installment blog is edited by Stanley D. Crow, who is president of S.Crow Collateral Corp.