205. Why Congress Provided for Monetized Installment Sales
204. Here's How to Do a Financial Analysis of the Probability-weighted Benefit and Tax Risk with M453
203. If a Seller Uses a Monetized Installment Sale (M453), Can the Resale Be an Installment Sale, Too?
202. Solve the Double-Tax Problem for Earnings of C Corporations with a Long-Term Installment Sale Coupled with a Monetization Loan
201. When You Can, and When You Canít, Change a Deal after the Fact, for Better Tax Treatment
199. Are We Really Able to Hear Each Other? Or Are We Locked in by What We're Sure We Know?
198. C453 is Presented in Meeting of Professionals, Principals and Advisors Connecticut
197. An Insured Can Defer the Tax on Sale of a Life Insurance Policy, But Partly on One Ground, and Partly on Another.
196. Liquidate a ďCĒ Corporation with Minimal Tax Cost, with C453
195. Hereís a Strategy for Your Benefit if Your LLC Partners Donít Need Tax Deferral when Your LLC Sells
194. With C453, Help Yourself and Your Favorite College, University or Other Charity, Too
193. The Doctor, the Tardis, Time Travel and Taxes
192. Find Out Whether a 1031 Exchange or a C453 with a Monetization Loan is the Better Choice for You
191. U.S. Bankruptcy Court Approves C453 for Sale of High-Value, Low-Basis Asset
190. With Higher Tax Rates, Our Business Enjoys a Substantial Uptick, Both Overall and in Deal Size
189. Can C453 Be Used for Sale of a Business to an ESOP?
188. "Who Gots It Don't Want It": 1099-MISC Income and Schedule D Income
187. Defer Tax on Commission Income, and Increase Your Disposable Cash Flow
186. IRS Chief Counsel Blesses Tax Deferral through an Installment Sale Coupled with a Monetizing Loan
185. Can a Residential-subdivision Developer Obtain Capital-Gain Treatment on Lot Sales? And Defer the Tax, Too?
184. A 1031 Exchange Scandal: Who Cares about the Taxpayer?
183. Can C453 Repeatedly Achieve Tax Deferral for the Same Money, As in Hopscotch?
182. Business-Normal Practice to Know Your Counterparty: Coherence, Reasonableness, Verifiability and Understandability
181. Keep Your Romance Alive, with Some Help from C453
180. C453 Can Avoid a Tax Hit on Disposition of Assets on Divorce, and Simplify Division as Well
179. Liquidate U.S. Investments and Invest the Gross Proceeds Internationally, without Having to Pay U.S. Taxes First
178. Sell Capital Assets without Current Tax Cost; Make Tax-deductible Gifts to Charity; Reduce Tax as Well as Defer; and Substantially Increase Cash Available for Other Uses
177. An Occasion for Sadness: When Advisers Let 1031 Exchanges Fail, or Cause Them to Fail
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.
175. Should You Choose a 1031 Exchange, or a Collateralized Installment Sale?
174. When to Use a Collateralized Installment Sale (C453) with, or in Place of, a Charitable Remainder Trust (CRT)
173. Hear about Collateralized Installment Sales on Smart Money Talk Radio Nationally on Monday, January 28
170. Will the New 3.8% Investment Tax and the Higher Capital-Gains Tax Actually Increase the Government's Revenues?
168. The New 3.8% Medicare Tax Can Be Deferred in Installment Sale Transactions.
167. Four CPE Credits for CPAs, January 15
166. Twelve Days of Christmas Tax Readings
165. How an Installment Sale Reduces Estate-Tax Liability
164. With Tax Deferral, You Needn't Rush to Sell Before the Tax Increase on January 1
163. Not in Good Health, a Taxpayer Finds a Solution to the Dramatic Increase in the Estate Tax Coming on January 1.
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
161. Use C453 to Eliminate Estate Tax and, with Life Insurance, to Transfer Assets and Cash to the Next Generation
160. The Price of Economic Uncertainty: 1% to 2% Higher Unemployment
159. A New Reason Why S.Crow Collateral Corp. Isn't Just Another Intermediary: Standing Advance Loan Commitments and Credit Enhancement for Our Sellers and Potential Sellers
158. How Markets Differ from Gambling and Pyramid Schemes
157. Here's a New Way to Achieve the Equivalent of Tax Deferral.
156. Don't Fence Me In: When Government Makes an Entrepreneur Feel Claustrophobic
155. Action Now Can Help You Cope with the "Tax Cliff" at the End of This Year.
154. A Case Study: Deferring the Debt-Over-Basis Tax (and Tax on Other Gain) when Encumbered Property Is Sold
153. Would You Like to Move to a Low-Tax State, without Paying an Exit Tax?
152. Here's a Better Solution for the Tax System and the Economy: A Graduated Retail Sales and Services Tax
151. Thinking Dangerously: When Docile Taxpayers and Their Advisers Give Away Legal Rights
150. For Doctors Who Sell Their Practices to Hospitals: Watch for Hidden Risks, Costs and Traps
149. An IRS Ruling and Collateralized Installment Sales
148. New Scientific Research Looks at How the Human Brain Deals with Taxes
147. The "Jevons Paradox", "Sustainability", Gasoline Prices, and Opting for Growth Rather than Decline
146. Why Our Sellers Want to Say to Us, "Please, please, don't pay, or at least don't pay now!"
145. How Does a Collateralized Installment Differ from a Deferred Sales Trust?
144. The IRS Has Issued Detailed Guidance on "Economic Substance". Let's Learn It and Use It.
143. Why Lenders Like to Lend to Those Who Sell to S.Crow Collateral Corp.
142. About Tax Advisers Who Think Installment Sales Equal Cash Sales. Sure, and I-95 Equals I-90.
141. Let's End the Confusion about the Tax Treatment of "Real" Transactions.
140. New Information, New Understanding and New Tools, Available Now, Avoid Regrets Later
139. Does Your Tax Adviser Read the Law, or Merely Read or Hear What Others Say the Law Is?
138. Avoid Tax at the Entity Level on Sale of a Business, Regardless of the Legal Form of the Entity
137. When Your Company Moves up in the Marketplace, the "Lake Erie" Criteria Help the Shareholders Select the Company's Board Members.
136. What Can Be Done for Tenant-in-Common Investors in Commercial Property Facing Foreclosure?
135. Can the Tax on Depreciation Recapture on the Sale of Equipment Be Avoided or Deferred?
134. Say It Isn't So: Political Risk Is Affecting American Business and Americans' Freedoms
133. No Dollar Limit Applies to Tax Deferral on Installment Sales of Agricultural Properties or Rights
132. How a Business Owner's Creative Thinking Led This Week to a Solution for Sale of His Business
131. CPI Rises to 3.9%, and Treasury Sees the Heaviest Bidding in 13 Years for TIPS; Maybe There's a Connection?
130. Today's Producer Price Index Report: Inflation Hits 0.8% in September (a 10% Annualized Rate)
129. For a Better Understanding of the Tax Code, Try Looking First at the Forest, Before Looking at Each Tree
128. Will the Now-Fainting 1031 Tax-Deferred Exchange Industry Ever Come Back?
127. The Flavor of the Week, Based on Customer Requests, Is the Looming Tax Cost of Commercial-Property Foreclosure.
126. Try to Be Calm about This News, But the Tax Problem on the Sale of a Business Is Solved.
125. The Federal Reserve Succeeds in Its Fight Against Deflation--But Inflation Rises.
124. Alert! Defer the Tax on Your Sales Commission Income, with DEFCOMM.
123. So, How Is That Advice That You Gave in 2007 Working Out?
122. Today's Market Rout, and When You Have Assets Which You Could Sell, But Not at a Price Anyone Is Willing to Pay
121. Selling Property at Auction Can Trigger Tax, Even if You Don't Net Any Cash--unless You Combine the Auction with a Collateralized Installment Sale.
120. Just the Facts, Ma'am: How to Minimize Tax-audit Fear.
119. How Can One Shelter Interest Income from Tax? Or Convert It to Capital Gain?
118. Follow These Practical Guidelines to Preserve Tax Deferral for Your Installment Sale, If You Borrow Money at the Same Time
117. The Government Has Painted Itself into a Corner Because of Debt, and Can Do Very Little to Help the Economy. The Private Sector Has Some Options Left, However.
116. Did You Hear about the 3.6% Tax Increase Just Now Quietly Announced? Or about the Further Tax Increase Coming Next Month?
115. How an Average Person Can Tell Effective Economic Stimulus from Ineffective Stimulus
114. Here's the Silliest Argument Yet, in Favor of Raising Taxes--and It Was Made With a Straight Face.
113. So, You Have a Property That's about to be Foreclosed. How Can You Save Your Credit, and How Can You Avoid Tax on the Excess Debt?
112. A Nationally Prominent CPA Joins in Conversation about Tax Deferral and Collateralized Installment Sales
111. Are There Hidden Costs Associated with a Collateralized Installment Sale? With Other Tax-Deferral Methods? What Is the Real Cost?
110. Will an Investment Adviser Prefer That a Client Sell in a Collateralized Installment Sale ("C453"), or in Some Other Way?
109. Will a Real Estate Broker Make More Money, or Less, with a Collateralized Installment Sale?
108. The "Economic Substance" Doctrine Is a Safe Harbor for the Tax Treatment of Your Transactions, So Use It.
107. Professionals Who Wing It, and Give Distorted Tax Advice
106. You Can Easily Avoid Tax on Relief of Debt. Here's How.
105. Set Sail Now--and Get Set to Sell Now--with Our Flagship
104. How Do You Feel--or What Do You Think--about the Whole Idea of Tax Deferral? Is It a Wholesome Activity?
103. A Done Deal: Seller Sells a Capital Asset and Defers Tax for 30 Years, But Has Equivalent Cash. How Can This Be?
102. "Wave of Frantic Consolidation in the Health Industry" Calls for Tax, Estate and Investment Planning, Now
101. Plan for Long-term Care, While Preserving Your Wealth with a Collateralized Installment Sale
100. How Do Pigeons, Innovation and Freedom of Contract Relate to One Another?
99. The Golden Egg: Create Your Own Investment Fund with MoneyThat Otherwise Would Be Required for Taxes
98. Subtle Deconstructionism Affects Legal and Tax Advisers, and You, Your Pocketbook and Your Freedoms
97. #2 in a Series: Announcement: You Participate in Loan Fees, And Everyone Benefits
94. #1 in a Series: Announcing: Tax Deferral with Complete Liquidity
93. Thank Heaven for Little URLs: One That Circumvents Tax-Deferred Exchange Problems
92. How Can the Seller Sell at 2007 Prices, While the Buyer Buys at 2010/11 Prices?
91. Buying a Property? Want to Reduce the Tax on the Lease Income after You Buy?
90. A Key to Growing Your Business: Use Your Knowledge of Yourself (Your Theme) As a Lens to See Opportunity
89. Better than an IRA: Pre-tax Money Buys "Underwater" Homes at Market or Less and Produces Income Not Taxable to You. Then You Finish by Deferring the Tax on Resale.
88. A Conversation about Saving a Particular "Underwater" Home Loan
87. Put Your Defense in Place Now, against the Estate Tax Beginning January 1
86. At Last: A Private-Sector Solution Shows up, for Underwater Home Mortgages
85. Are We There Yet? --Not Now, Not Later, if "There" Means Paying the Capital Gains Tax
84. A New Philosophy of Tax Benefits: How to Obtain Happiness and Tax Benefits, Too
82. Minimizing the Tax on Marcellus Shale Mineral Rights Income
81. "That's the way it's always been done."--How Government and Business Really View Innovation
80. Selling into a Down Market: Why Sellers and Buyers Should Stop the Waiting
79. "If only I'd Known Then What I Know Now": Q&A about Commercial Loan Portfolios, While There's Still Time.
77. Defer the Tax on the Sale of Your Business, and Pay the Tax Later in Cheaper Dollars
75. S.Crow Collateral Corp. in Business Week
76. How Can Your Bank Profitably Reduce Its Exposure to Commercial Real Estate?
74. Avoid the Power Trip: Don't Get Above Yourself
73. Two Moves Ahead: Playing Dynamically to Win in Today's Economy
72. Take a Number, for Bank-owned Commercial Properties: How the Bank Can Sell High, and You Can Buy Low
71. Reading the Warning Signs: Is Is Worth Trying to Do Business with a Narcissist?
70. On Being #1: A Largely Unobserved Incoherence about Innovation and Leadership, in American Business
69. Part 5: Is It a Gimmick, or Is It Worthy of My Time to Hear? It's *Not* Whom You Know
68. Part 4: Is It a Gimmick, or Is It Worthy of My Time to Hear? About Loopholes vs. Substance
67. Part 3: Is It a Gimmick, or Is It Worthy of My Time to Hear? About Black Swans, and Surprises
66. Part 2: Is It a Gimmick, or Is It Worthy of My Time to Hear? How Excited Is the Proponent?
65. Part 1: Is It a Gimmick, or Is It Worthy of My Time to Hear? The Role of a Stated Economics Rationale
64. In a Short Sale of Your Commercial Property, Why Not Pay Your Loan in Full?
63. We Can't Cause Market Values to Rise, But We Can Increase Your Equity Immediately
62. Let's Opt Out of a Decade of Stagnation in Commercial Real Estate Prices
61. It's a Roller Coaster around Here, As We Work with Those Who Are at the Top, and Those Who Were at the Top
60. A Rescue for TIC Investors in Troubled Properties or Who Just Want Out without Being Taxed to Get Out
59. The Ever-Present Logical "Fallacy of Division" in Public Discourse Makes a Dumb Argument Sound Good
58. I Sang for My Father: For Optimism in Opportunity
57. Red Flag #2 about DSTs: Invitation to a Conflict of Interest
56. About Clamor at Parties, to Learn about Tax Deferral or Resolving Troubled Commercial Loans
55. How Does a Collateralized Installment Sale Differ from a Sale to What Is Called a Deferred Sales Trust?
54. 1. Dealburt Retires. 2. "Regulatory-Risk" Aversion Will Reduce Economic Growth.
53. Ready for Prime Time: Our Criteria for Resolving Troubled Commercial Loans
52. What's the Easiest Way to Minimize Your Risk of Investment Loss? Postpone the Tax on the Previous Investment.
51. One Size Fits One: Because Every Situation Is Unique, Every Transaction Should Be Unique, Not a Formula
50. The Creative Process, Categorical Reasoning, and Tax Minimization
48. New: A Perpetual Collateralized Installment Sale: Permanent Tax Deferral in Unlimited Amounts
The Latest Installment
Thank Heaven for Little URLs: One That Circumvents Tax-Deferred Exchange Problems
January 11, 2011
Q. I want to sell my personal residence and have an interested buyer. The problem is that unless there is a way around it, when I sell I will face a capital gains tax on about $2 million in taxable gain. I have been told that if I lease the home to the buyer for a year or two before selling it, the sale can be done as a tax-deferred exchange under Section 1031 of the Internal Revenue Code. Is that right?—Gaining Ground
A. Dear GG: Thank heaven for little URLs, such as the one for this page, which is your resource for a better way to accomplish your objective. Leasing a personal residence to convert it into an investment property to qualify for tax deferral in a 1031 exchange is a frequently chosen course of action, but it is unduly time-consuming and unduly risky, especially considering that a simple and quick alternative—one that doesn’t require waiting a year or two—is at hand.
Market risk exists with the leasing idea, because 1031 exchanges are designed for markets in which prices are rising and in which leverage (debt) can be readily increased or maintained. For complete deferral, Section 1031 requires that the exchangor pay as much or more for a replacement "like-kind" property, and it does not allow any de-leveraging without paying tax accordingly now. In a falling market, that can be very difficult. The market now is not one of rising prices and readily available financing, and who knows about a year or two from now?
One cannot forecast with confidence what the housing market will be like when the time comes for the sale, when the lease expires. If the housing market then is much as it is now, it may be difficult to find a suitable, desirable, like-kind property within the stringent time limits of Section 1031 (45 days to identify, 180 days to purchase).
There’s a further price risk. The combination of the trading-up requirement for a tax-deferred exchange, the prohibition on de-leveraging, and the subtle feeling that money that is held by the 1031 accommodator is then "free" money which one can spend without cost causes exchangors to be prone to pay too much for a replacement property. (Economists have documented the effect.)
Further, you would take the risk that your interested buyer might not then be able to purchase the property when the lease expires. Is it a sure thing that this buyer or another one will have the money and be able to qualify for any necessary financing one or two years from now?
There’s more. Even if you are completely successful with the lease and subsequent exchange, there’s a tax disadvantage that’s often overlooked: your tax basis in the replacement property will be a "carry-over" basis from your tax basis on the home you’re disposing of, so your depreciation deductions on the replacement property will be constrained. As a consequence, just so that you can defer tax at the capital-gains rate you will forego ordinary-expense deductions which you could have had by simply selling (rather than exchanging) and then buying. Why is that a good deal?
A quicker and less-risky alternative is to sell your home now as an installment sale under Section 453. You don’t have to do anything to convert it to investment property, you don’t have to take risk that the buyer won’t pay (ask me how, if you wish), you defer the capital-gains tax, and you have no re-investment requirement whatever, no time limits, no "like-kind" requirement, and no requirement to buy anything. When and if you choose to buy, you will buy in your own good time, at the price that’s right in the market then, with a new basis in the property with which to begin taking higher depreciation deductions.
Now that’s worth singing about.—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.
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