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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
November 10, 2010
Nearly everyone understands that paying the capital gains tax is voluntary in the sense that the tax is due only when an asset is sold for a gain. Nearly everyone understands that the timing of that sale, or whether that sale occurs at all, is something the owner of that asset can control, apart from some emergency.
On the other hand, it is important for particular owners and for the economy as a whole, that owners be able to sell assets as needed—such as when the asset becomes unproductive in one owner’s hands but could be put to a higher and better use in someone else’s hands. Asset mobility, in other words, allows the economy to maximize efficiency and economic growth.
Also, nearly everyone understands—well, nearly every owner of capital assets understands—that the capital gains tax can make a sale so costly to the present owner that the tax deters the redeployment of assets to their most productive uses through sale to someone else. The tax can also prevent the owner from switching into a different investment which that owner could use more productively.
I like to think of investing as a journey along a road that will never end, with the adventure of the travel being the purpose of the trip, rather than being in a hurry to reach the end of the road. Once the journey begins, the object is to continue, not to sell the car and sit down beside the road to do nothing.
So, is there a way continually to improve our resources for the journey, without having to stop to pay the capital gains tax?
If you guessed that my answer to that question is "yes", you guessed right.
A clue to part of the mechanism to do that can be found in the "perpetual" investment instruments which are more common in some other parts of the world than they are in the U.S. However, the "perpetual" investment instrument would have to be essentially a diversified, floating-rate instrument which keeps pace with market conditions and economic growth, for both income and principal. Another key would be to be able to get into such an investment without paying the capital gains tax on the sale of the asset you have now.
Both of those can be accomplished, through a collateralized installment sale at a price that is equal to one’s tax basis in the existing asset being sold (so that there’s no tax on the sale, ever), and to have the installment debt be collateralized by that diversified, floating-rate perpetual instrument, so that your cash flow and opportunity for appreciation in value are commensurate with the gross, pre-tax value of whatever it is that you wish to sell.
What I’ve said here is an introduction to what we call a "PC453". With a PC453, the capital gains tax is not deferred; it just never comes due, because there is no capital gain to be taxed. Nevertheless, your overall return on the installment contract can be commensurate with the full market value of the asset you are selling.
You don’t have to ask, "Are we there yet?" because the travel is the point, not getting "there", and not liquidating and paying the tax.
Let’s have a conversation about the journey—how it begins, what to take along, how to prepare, what to expect, and so on. The adventure awaits you.—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.