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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
January 8, 2015
All right, it’s time that we talked this matter out: a real heart-to-heart conversation in which each of us hears—really hears—what the other is saying.
As I understand it, what you’re saying to me is that you are the attorney for the owner of a $100 million commercial building. The owner has a tax basis of $20 million. He wants to sell, and he doesn’t want to do a 1031 tax-deferred exchange; he’s done lots of those already, and now he wants an exit strategy—not just another trade, not just another property to manage, but a real exit without having to pay the capital gains tax now.
When I say to you that your client should consider an installment sale coupled with a monetization loan (as the Internal Revenue Service calls it) as a tax-deferred exit strategy, you sort of blow me off. (Pardon me for putting it so bluntly.) You say that of course a $100 million installment sale won’t do the trick, because of the requirement in Internal Revenue Code Section 453A that the seller pay interest to the IRS on the deferred tax if the installment sale price exceeds $5 million per owner (unless it’s agricultural or personal-use property).
I reply: Here’s where it gets really interesting, but it’s also where it gets really difficult and requires some patience to hear me out. What I’m saying is that the transaction components—although they are difficult—can indeed be put together in such a way that what would otherwise be a $100 million commercial-property sale can be done without the seller’s being required to pay interest to the IRS on the deferred gain. Doing this requires the execution and performance of a set of transactions, each of which:
· has substantial economic substance in its own right, quite apart from tax effects;
· makes financial sense for each party, for that transaction alone and for the set of transactions taken together;
· is undertaken for substantial business purposes and not just, or even primarily, for the intended tax benefits;
· complies with applicable statutes, regulations and tax doctrines;
· avoids original-issue-discount (OID) concerns; and
· permits full tax deferral (including for depreciation recapture) for up to 30 years.
Moreover, these transactions may well result in tax reduction for the seller, not just tax deferral.
When you hear all of this, it may surprise you to learn that tax deferral is not even what drives all of this. Yes, from your seller-client’s point of view, tax deferral may loom very large in his thinking, but what drives this is that these transactions—the installment sale coupled with a monetization loan—materially increase the risk-adjusted return for the lender with which S.Crow Collateral Corp. works (the lender which offers a monetization loan to our seller). If you can really take this on board—that taxes aren’t everything, and that not everything you have always understood about lending is really the way things must always be—then a whole new vista of opportunity can be brought to your client.
I emphasize again, though, that this is not easy. It is difficult. It is hard. You have to be willing to set aside what you know you know, and you must be willing to re-think. If that’s not for you, let’s stop right now. On the other hand, if you’re the one in 100 who is willing to re-think what you know, let’s continue the conversation.—Stan Crow
Photo credit: http://www.flickr.com/photos/kdavidclark/4533381951/in/photostream/, Creative Commons Attribution 2.0 Generic 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.