Do you own highly appreciated real estate, personal residence, second home or investment property in the state of California than you know exactly how important it is to make as much profit as possible from the investment during the time that you own it. It is just as important to keep as much money from the proceeds of the sale when you decide to sell that investment property. Unfortunately, the Internal Revenue Service (IRS) charges a significant tax on the profit from the sale of your investment. It is called the capital gains tax.
Other than providing the federal government with yet another means of taxation, the capital gains tax does not actually make sense from an economic standpoint. In fact, the tax traps wealth within the investment vehicle. Special techniques must be utilized in order to free that capital without having to pay the taxes. Of course these special techniques must be performed in both a legal and ethical manner. One such technique is called the installment sale method. Tax Deferred Sales, LLC (“TDS”)is a specialized expert Installment Sale Purchaser of appreciated assets such as real estates and its purchase transactions are focused on delaying taxation on the sale of appreciated real estate.
While a great deal of real estate investors partake in the 1031 tax deferred exchange method for investment real estate, a 1031 is not available for personal residences and second homes which have never been rented out, the installment sale method is far superior for a number of reasons. First and foremost, real estate investors are not forced to purchase a replacement property. Under a 1031 transaction, the seller must identify a replacement property within 45 days of closing. The seller must also close on the replacement property within 180 days of the sale of their original property.
That is why so many of 1031 transactions face potential failure. It goes without saying that it can be extremely difficult to meet those demands. The good news is that an installment sale is a great strategy to saving a failing 1031 transaction if you find yourself in that situation or just as an alternative to a 1031 transaction and can provide tax deferral on real estate sales not qualifying for 1031 treatment. An installment sale works in the following manner.
Seller sells his building for $4,000,000 with a $3,000,000 capital gain profit, which is subject to taxation if not legally deferred by Seller. If Seller successfully completes a Section 453 Installment Sale with an installment sale purchaser Tax Deferred Sales, LLC there will be large tax deferral results from Seller selling via an installment sale. Under the Installment Sale method Seller Instead of receiving the $4,000,000 in one lump sum, and paying the associated capital gains tax on the $3 million dollar profit, Seller sells via an installment sale plan that will provide him with ten (10) annual payments of $400,000. That means Bob is only taxed on the $400,000 per year as opposed to the entire $3,000,000 profit in one tax liability payment. Thus, Seller will delay his taxation on the $3 million in profit and will only pay taxes as he receives his payments, which may also reduce his overall tax impact, and Seller advantageously also get to receive back his original cost basis plus costs of improvements income tax free.
The real estate Seller receives installment payments that are made on a monthly or yearly basis for a period of years is the legal mechanism under section 453 Installment Sale method which provides for tax deferral to Seller. The amount of years is determined by the real estate investor/Seller as opposed to the IRS. This greatly benefits the real estate investor/Seller from a taxation perspective because taxes are only filed on the income tax as the installments are received. That means the taxes are spread out over the life of the installment payments instead of in one lump sum often resulting in an overall lower tax liability.
If you need help setting up an installed sales plan in California or have any questions, please contact Tax Deferred Sales today. TDS has specifically developed a proprietary tax expertise Installment Sale transaction structure that does not have to involve the purchase of a replacement property or properties when selling real estate for profit. TDS can save a failing 1031 transaction or proved sellers with a better option to a 1031 exchange. 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.