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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
August 15, 2014
When a limited liability company is preparing to sell appreciated real estate, it’s not unusual for some of the LLC partners to have no need for deferral of the tax on their part of the gain on sale, while other partners very much want to defer their shares of the tax on the gain.
That situation can arise, for example, if some of the partners have accumulated capital losses which they want to use to balance against the gain on the upcoming sale. So, those partners prefer not to have the LLC sell the property in a “collateralized installment sale” or “C453” transaction, while other partners who don’t have accumulated losses need the tax-deferral benefit of C453.
How can the transaction be structured to make everyone happy? I suggest two alternatives: (1) At the time of the closing on the sale of the real estate, have the partners who don’t want C453 buy out the ones who do; or (2) at the time of the closing on the sale of the real estate, have the partners who want C453 buy out the ones who don’t.
Whichever alternative is chosen, the C453-participating partners can defer, for as long as 30 years, the tax on their shares of the gain, and the non-participating partners can take their part of the gain immediately.
The C453 Partners Sell: If the C453-participating partners sell their interests in the LLC to S.Crow Collateral Corp. in a C453 transaction, S.Crow Collateral Corp. will simultaneously re-sell those interests to the partners who do not want a C453 transaction. Those partners will then own the entire LLC, which will, also simultaneously, sell the real estate to the ultimate buyer for cash. The LLC will recognize all of the gain on the real estate sale, and its then-remaining partners will get the cash-sale treatment they want. The C453-participating partners will defer the tax on their gain on the sale of their partnership interests, so they will get the tax treatment they want. Everyone is happy with the outcome.
The C453 Partners Buy: If, instead, the C453-participating partners are the buyers rather than the sellers, they may be even happier. Then the C453-participating partners will own the entire LLC, so that the LLC can then sell the real estate with C453, in an entirely tax-deferred transaction. If those partners can negotiate a price for their buy-out of the other partners that is at or near the after-tax value of the other partners’ interests, then the C453-participating partners can essentially enjoy the tax benefit which the other partners don’t need. In a recent instance, doing the deal that way presented the C453-participating partners with a 28% higher up-front benefit.
Two limiting factors may come into play, though, when the C453-participating partners propose to buy out the others for the after-tax values of the latter partners’ interests in the LLC: (1) To the extent that the non-C453 partners have available capital losses to balance the gain, for them the after-tax value of their interests may be close to, or the same as, the pre-tax value of their interests, and to that extent the C453-participating partners might not be able to buy the others’ interests at the desired discount; and (2) even for a sale of partnership interests at their after-tax value there still may (or may not) be a net taxable gain and net tax cost (after available losses) for the sellers of those interests.
Regardless, the C453-participating partners may defer the tax on their part of the gain either way, and they may be able to increase their benefit even more if they buy out the other partners.—Stan Crow
Photo credit: http://srcanterburytales.wikispaces.com/The+Glastonburians, Creative Commons Atribution Share-Alike 3.0 License. No changes were made.
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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.