A 1031 exchange is not your only option for deferring burdensome capital gains taxes when you sell your investment property in California. Furthermore, there is a method that can save failing 1031 transactions. Find out how a Tax Deferred Sales, LLC (“TDS”) installment sale may very well be your best tax strategy by continuing to read this informative article. An installment sale is a method that is utilized in order to defer capital gains tax when selling investment real estate, second homes and primary residences that are subject to a capital gains tax.
As opposed to receiving all the sales proceeds at once in one lump sum at the closing of the sale, the net sale proceeds are utilized to collateralize a contractual payment obligation back to the Sellers and Sellers are only taxed when the funds from the sale are actually received in a payment stream to the Sellers. This strategy allows for reinvest the proceeds as collateral payments back to the Seller by investments of the proceeds that are simply not allowed under other capital gains tax deferment methods such as the 1031 exchange. A plethora of 1031 transactions fail due to this fact. For example, if you cannot identify a “like kind” replacement property of equal or greater value within 45 days of the sale of your investment property, the 1031 transaction fails.
If you cannot close on the property that you identify within 180 days of the sale of your investment property, the 1031 transaction fails. There are absolutely no exceptions to these rules. The bottom line is that under a 1031 exchange, you are forced to purchase more investment property (for example, not a vacation home or primary residence), and you must do this under an incredibly strict time frame. The installment sale method works with the IRS’s Tax Code 453, which legally allows taxpayers from being forced to pay taxes on money that they have not yet received but are contractually required to be paid and received by the Seller in the future. Spreading out payments to the Seller into the future, by the Sellers’ chosen repayment schedule is the legal mechanism under the Section 453 Installment Sale method, which allows the Sellers’ to control achievement of their tax deferral goals.
An installment sale initiated with a highly specialized Installment Sale Purchaser, such as Tax Deferred Sales, LLC (“TDS”) provides the Seller with great flexibility and security to receive an annuity type cash flow into the future. Specific rule must be followed throughout the entire process in order to enjoy the tax benefits that it offers to Sellers on their chosen payment schedules. That means you should always consult with a taxation attorney that specializes in these types of tax strategies prior to entering into any transactions.
TDS can often buy from Sellers even where Seller is under contract to sell to another Buyer (for example, if Buyer has and outstanding financing contingency). A Seller in such a situation by selling to TDS first is simply hedging that buy selling to TDS, Seller will have a completed transaction and end Seller’s ownership obligations with the completed sale. TDS as buyer can provide Sellers substantial safety and payment guarantees over the net proceeds it receives from its subsequent reselling of the property.
The net sale proceeds TDS receives in such a subsequent sale it the collateral that provides safety for Sellers repayment. Seller receives payments monthly or annually for the number of years the Seller Chooses. The seller pays capital gains taxes on the principal amount that he or she received from the installment payments. Capital gains taxes are paid over time as the Seller receives payments which often will reduce Sellers’ overall tax burden. By utilizing the installment sale method, you do not get out of paying capital gains taxes, however it does allow you to defer the taxes while profiting from portions of the proceeds or reinvesting the money.
If you need help saving a failing 1031 transaction in California, please contact Tax Deferred Sales today. TDS has specifically developed a proprietary tax expertise Installment Sale transaction structure to save failing 1031 exchange transactions. Our team of experts specializes in providing customized strategies that delay tax impact. TDS takes great pride in assisting sellers of appreciated assets in deferring the capital gains tax that greatly enhances the ability to grow your net worth. Our company was founded by a LLM tax attorney with over 20 years tax deferral experience and expertise with a singular focus on assuring sellers delay of taxation.