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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
February 27, 2013
Because it has been a while since we last did so, we’ve been asked to provide a comparison of tax-deferred exchanges under Section 1031 of the Internal Revenue Code, with tax-deferred collateralized installment sale ("C453") transactions under Section 453.
Unlike 1031 exchanges, with C453 transactions the following are true:
* No 45-day time limit applies, for identification or anything else;
* No 180-day time limit applies, for purchase of replacement property or anything else;
* No constraint on bargaining power exists because of time limits;
* No like-kind limit applies;
* No replacement requirement applies;
* No current tax on "boot", if there is any, need be incurred;
* No requirement exists, as a condition of tax deferral, to maintain at least the present level of debt (the seller can pay off debt and still enjoy complete tax deferral);
* No limitation applies, to limit the range of things in which one can invest cash after the sale;
* No inducement exists, to over-pay for replacement property;
* No carry-over basis limitation applies;
* No credit risk exists concerning any intermediary; and
* No risk exists that the transaction will fail because of market conditions or inability to obtain financing in time.
A 1031 exchange is a strategy which assumes a rising market, an ample supply of buyers, an ample supply of available replacement properties, and ready availability of financing. In today's conditions, a substantial portion of attempted 1031 exchanges fail, and the exchangor achieves no tax deferral. (Just this past Saturday, a would-be exchangor contacted me to find out whether S.Crow Collateral Corp. could rescue an exchange for which the 180 days would expire the very next day. The exchangor had been unable to complete arrangements in time for financing for the purchase of replacement property. We might have been able to do it if we’d had at least one business day, but not on a Sunday that is the 180th day.)
Unlike with a 1031 exchange, a C453 leaves the timing and terms of the disposition and the replacement, if any, entirely within the seller's control, with no constraints on bargaining power because of time limits which advantage the other party.
Futher, unlike a 1031 exchange, a C453 transaction can be an exit strategy, and not just a forced reinvestment strategy.
A C453 is an installment sale to a dealer in capital assets such as S.Crow Collateral Corp., on a contract term for as long as 30 years and with the entire capital-gains tax deferred for that 30 years. The dealer then turns around and sells the asset, usually to the one who otherwise would have purchased the asset directly from the seller. A lender which works with S.Crow Collateral Corp. is willing to lend to our seller an amount that is equal to a high percentange of the asset's selling price, and to structure the loan so that S.Crow Collateral Corp.'s installment payments will fully fund the seller's loan repayment (also as long as 30 years away). The lender further agrees in writing that the lender cannot compel the seller to pay any money to repay the loan over and above the money which S.Crow Collateral Corp. pays to the seller on the installment contract.
So, unlike with a 1031 exchange, the seller goes away from the loan closing with non-taxable loan proceeds in hand which can be invested when, where and how the seller chooses, with no tax-induced time limits.
Finally, a failing 1031 exchange can be rescued by a C453. A 1031 exchange can’t rescue anything else, but then, no C453 needs rescuing.--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.