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205. Why Congress Provided for Monetized Installment Sales
201. When You Can, and When You Can’t, 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
196. Liquidate a “C” Corporation with Minimal Tax Cost, with C453
194. With C453, Help Yourself and Your Favorite College, University or Other Charity, Too
193. The Doctor, the Tardis, Time Travel and Taxes
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
184. A 1031 Exchange Scandal: Who Cares about the Taxpayer?
183. Can C453 Repeatedly Achieve Tax Deferral for the Same Money, As in Hopscotch?
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
177. An Occasion for Sadness: When Advisers Let 1031 Exchanges Fail, or Cause Them to Fail
175. Should You Choose a 1031 Exchange, or a Collateralized Installment Sale?
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
160. The Price of Economic Uncertainty: 1% to 2% Higher Unemployment
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.
153. Would You Like to Move to a Low-Tax State, without Paying an Exit 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
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
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
132. How a Business Owner's Creative Thinking Led This Week to a Solution for Sale of His Business
130. Today's Producer Price Index Report: Inflation Hits 0.8% in September (a 10% Annualized Rate)
128. Will the Now-Fainting 1031 Tax-Deferred Exchange Industry Ever Come Back?
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?
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?
115. How an Average Person Can Tell Effective Economic Stimulus from Ineffective Stimulus
109. Will a Real Estate Broker Make More Money, or Less, with a Collateralized Installment Sale?
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
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?
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?
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
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
71. Reading the Warning Signs: Is Is Worth Trying to Do Business with a Narcissist?
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?
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
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
54. 1. Dealburt Retires. 2. "Regulatory-Risk" Aversion Will Reduce Economic Growth.
53. Ready for Prime Time: Our Criteria for Resolving Troubled Commercial Loans
50. The Creative Process, Categorical Reasoning, and Tax Minimization
48. New: A Perpetual Collateralized Installment Sale: Permanent Tax Deferral in Unlimited Amounts
June 17, 2013
Sam Savvy owns a capital asset (in his case it’s real estate, but it could be about any other capital asset) worth $10 million, for which his tax basis is zero. Sam has a buyer who is ready, willing and able to pay the $10 million. Sam no longer wishes to retain the real estate, but selling the real estate would cost him $3 million in tax on the sale, based on his tax bracket and the state in which he resides.
Sam also would like to give $1 million to his favorite charity, a university, but he wouldn’t have the cash to do so without first selling the real estate. On the other hand, he doesn’t want to pay $3 million in taxes and give away another $1 million. If Sam has sufficient income so that he can use the entire $1 million deduction for the gift, at the 30% tax rate that deduction will save him $300,000 in tax on his other income.
For that cash sale, Sam would have these results, with and without a $1 million gift:
Sam has asked S.Crow Collateral Corp. whether a tax-deferred "collateralized installment sale" or "C453" transaction would improve his results, with or without the charitable gift.
The answer is a strong yes, in either of two ways.
(Before we look at those two ways, let’s set aside the question he didn’t ask: whether an installment sale of his property can be fully tax-deferred, notwithstanding the $5 million limitation of Section 453A of the Internal Revenue Code. It can be fully tax-deferred, but this isn’t the time to discuss how.)
Alternative #1: C453 Sale of Entire Ownership with Separate Loan and with Gift of $1 Million Cash
Sam sells the real estate for $9.5 million to S.Crow Collateral Corp. in a 30-year fully tax-deferred, interest-only C453 transaction in which no payment of principal will occur until the end of those 30 years. Sam will have no net tax cost because of the sale, until the end of those 30 years. S.Crow simultaneously re-sells the real estate to the buyer who otherwise would have purchased directly from Sam in a fully taxable transaction.
At the same time, Sam receives $9.4 million in non-taxable loan proceeds from a third-party lender introduced to Sam by S.Crow Collateral Corp., with repayment of the loan guaranteed to be fully funded by the installment contract with S.Crow Collateral Corp. Sam then donates $1 million in cash to the university and deducts that gift as a charitable contribution.
For that C453 sale and separate loan, Sam would have these up-front results, with and without a $1 million cash gift to the university:
So, with or without the charitable gift, Sam has $2.4 million more in cash up front than he would have had with a cash sale. If he decides to make the charitable gift, he can do so from money which he would otherwise have paid in taxes, and still have $1.7 million more than if he had sold for cash and had given the university nothing.
Of course, if he defers the tax with C453 he’ll still have to pay the tax 30 years from now. If the tax is then at the 30% rate, the tax will be $2.85 million (30% of $9.5 million). If Sam invests at a 3% after-tax rate the extra $2.4 million which C453 and the separate loan make available to him, in 30 years that extra $2.4 million will provide him with $5,825,430. He can then pay the $2.85 million in tax and have $2,975,430 left over, just from investing the extra $2.4 million. In today’s dollars (using a 3% discount rate), that $2,975,430 is worth $1,225,878 now.
So, as compared with a cash sale, Sam’s overall 30-year results for selling 100% of the property to S.Crow Collateral Corp. in a C453 transaction, with the separate loan, and with and without a $1 million cash gift to the university, are as follows:
Getting $3,625,878 more from Sam’s $10 million property means that the C453 transaction is 36% better for Sam than a cash sale would be.
Alternative #2: C453 Sale of 90% Ownership with Separate Loan and with Gift of 10% Ownership
The outcome of Alternative #1 is quite wonderful, but Sam can improve his results even more, with a slight change in the deal.
Instead of selling the entire real estate to S.Crow Collateral Corp., Sam sells a 90% interest in the real estate to S.Crow Collateral Corp. in a C453 transaction for $8,550,000 and gives the university a gift deed for a 10% interest in the real estate. For $1 million, the university sells its 10% interest to the buyer whom Sam had found, and S.Crow Collateral Corp. sells its 90% interest to that buyer for $9 million.
For that 90% C453 sale and separate loan, Sam would have these up-front results, with a gift of a 10% interest in the property to the university:
Sam achieves $2,460,000 more cash up front than he would with a cash sale with a $1 million gift, and $60,000 more than he would in a C453 sale of 100% ownership of the property to S.Crow Collateral Corp. with a $1 million cash gift.
When Sam pays the tax 30 years from now, there will be some additional savings there as well. If the tax is then at the 30% rate, the tax will be $2,565,000 (30% of $8.55 million instead of 30% of $9 million). If Sam invests at a 3% after-tax rate the extra $2.46 million which C453 and the separate loan make available to him, in 30 years that extra $2.46 million will provide him with $5,971,066. He can then pay the $2.565 million in tax and have $3,406,066 left over, just from investing the extra $2.46 million. In today’s dollars (using a 3% discount rate), that $3,406,066 is worth $1,403,254 now.
So, as compared with a cash sale, Sam’s overall 30-year results for selling a 90% interest to S.Crow Collateral Corp. in a C453 transaction, with the separate loan, and with a gift of a 10% interest in the property to the university, are as follows:
Getting $3,803,254 more from Sam’s $10 million property means that a C453 sale of a 90% interest in the property, with a gift to the university of a 10% interest in the property, is 38% better for Sam than a cash sale and $1 million cash gift would be.--Stan Crow
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.