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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
June 27, 2013
Experienced participants in tax-deferred exchanges under Section 1031 of the Internal Revenue Code are well aware that Section 1031 does not permit tax deferral if the replacement asset is located outside, or predominantly used outside, the United States.
That’s because subsection (h) of Section 1031 declares, "Real property located in the United States and real property located outside the United States are not property of a like kind." As to personal property, subsection (h) goes on to say, "Personal property used predominantly within the United States and personal property used predominantly outside the United States are not property of a like kind."
Because tax-deferred exchanges under Section 1031 are limited to "like kind" exchanges, and because foreign property is not regarded as "like kind" to U.S. property, Section 1031 does not permit tax deferral when U.S. property is replaced with foreign property.
Nevertheless, there is another way to accomplish the same thing: tax-deferred disposition of U.S. property and replacement of it with foreign investments.
That way is to sell the U.S. property in a tax-deferred installment sale under Section 453, particularly a "collateralized installment sale" or "C453" transaction. Furthermore, tax deferral for 30 years can be achieved even if the value of the property far exceeds the $5 million limit of Section 453A.
Further-even-more, in the case of a collateralized installment sale to S.Crow Collateral Corp., a third-party lender is willing to lend to the seller, at closing, cash equal to, say, 95% of the proceeds received by S.Crow Collateral Corp. when it re-sells the asset. The loan will be limited recourse, and repayment of it will be assuredly funded by S.Crow Collateral Corp.’s payments on the installment contract with the seller.
The seller may then use those non-taxable loan proceeds to invest internationally, without having had to pay tax on the disposition of the U.S. property.--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.