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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
October 12, 2010
When the owner is an investment fund which took in money from investors to buy that asset in the first place, the owner may be reluctant to sell at a loss, because of those investors; as long as the investment fund continues to hold the asset, it doesn’t have to admit to itself or to those investors that any loss exists.
When the owner is a regulated lender that has acquired the asset in foreclosure or relinquishment by the borrower, the lender is likely to be reluctant to sell at a loss because of the effect that loss would have on its reported capital or income, or both.
When the owner is an individual, he or she is just as likely to be reluctant to admit that an investment decision hasn’t turned out well in recent years. By continuing to hold the asset in hopes that the economy will turn around and rescue that investment, the owner can delay (and hope to avoid) that admission of truth, even to oneself.
In a macroeconomic perspective, all of these particular decisions to hold on are delaying economic recovery. That is because these particular decisions are delaying the redeployment of resources into more productive uses, and these decisions are delaying the completion of the market correction that must occur before prices can find a floor from which to rise again.
Also, while each owner makes that decision to hold on, most other owners are making the same decision. Taken together, all of them are stifling the transaction activity that could make it possible for any one of them to achieve what he or she thinks would be a good price at which to sell.
You often hear about the huge sums of money that are "sitting on the sidelines" waiting to be invested. Why do you think that’s happening?
Yes, uncertainty about future tax rates and the regulatory burden are big factors. Another big factor, though, is that those with money to invest are waiting until they know that they can buy at prices that represent known values. They need to see that the correction has occurred. Until then, they wait.
Would-be sellers wait.
Would-be buyers wait.
What do do? Here’s a wise principle: Forget the past and why, how, and at what price you acquired the asset. Whether a sale now would be at a loss is irrelevant to what you should do now. If you had purchased the asset at the price at which it can be sold today, would you sell it today? If so, then by all means sell it today.
To say that another way: If you could put the money to better use today by selling, then sell. If you could put the money to better use, then that’s true regardless whether selling now would mean a loss. If you could put the money to better use today by selling, it doesn’t even matter whether the market is rising or falling; if you opt for the most efficient use of your resources, you won’t go wrong.
Sure, maybe you could hold on for however many years it will be until the economy rescues you, and then you will congratulate yourself that you were such a wise and forward-thinking investor. But how much better off would you be then, if you had quickly redeployed your resources today for greater efficiency?—Stan Crow
P.S. Blatant self-promotion: All of this is doubly true for lenders and borrowers who are trying to cope with troubled commercial loans. With what S.Crow Collateral Corp. can do to clean the slate, holding on to a troubled asset in hopes of better times really doesn’t make sense.
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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.