Selling your investment property for a tremendous profit in California is the goal of the vast majority of real estate investors. However, in order to truly retain actual use of the most amount of sale proceeds money it is key to defer paying the capital gains tax. That means you simply cannot take your proceeds in the form of a lump sum. Although that may be tempting, the tax implications can literally wipe out a significant portion (30%) of your profit margin. So what is a real estate investor to do? There are actually a couple of ways to delay paying capital gains taxes. Delaying taxes is most important as a Sellers’ continue use of what would have ordinarily been lost as paid out tax liabilities will increase the Sellers’ Net Worth.
For example, you may have heard of a 1031 tax deferred exchange. It is a tax deferment method that works in some, but not all situations. The reason that many 1031 transactions fail is due to the fact that there are a plethora of strict rules and regulations that are difficult to meet. That is exactly why the installment sales strategy is the preferred choice of experienced taxation attorneys that have the knowledge on how to properly defer capital gains tax payments. As detailed in Publication 537, the Internal Revenue Service (IRS) allows taxpayers to defer gains on the sale of property and other investments as long as an installment sales agreement is in place.
The system provides sellers with the ability to declare a prorated share of their capital gains over multiple years. The paperwork must be completed during the year of the sale. In essence, declaring gains under the installment sale method is basic by nature. For example, taxing installment sales is similar to annuities. It works in the following manner. Only a prorated portion of each payment is actually considered a return on the principal balance. That being stated, there are two (2) major stipulations that must be followed. The investment property in question cannot be a publicly traded security of any kind.
This stipulation does not typically affect real estate transactions. The second stipulation is that the seller cannot be a dealer of the property in any manner. Let’s take a look at an example of an installment sale transaction so you can see how the numbers break down. Accordingly, business inventory type property cannot be sold on the installment sale method.
Bob 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 Bob. If Bob can successfully complete a 1031 Exchange there will be a delaying of Bob’s tax liability, similarly if Bob successfully completes a Section 453 Installment Sale with an installment sale purchaser Tax Deferred Sales, LLC there will also be large tax deferral results from Bob selling via an installment sale. Under the Installment Sale method Bob Instead of receiving the $4,000,000 in one lump sum, and paying the associated capital gains tax on the $3 million dollar profit, Bob 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, Bob 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.
…. To Be Continued
Please contact Tax Deferred Sales today. TDS has specifically developed a proprietary tax expertise Installment Sale transaction structure that is far more effective than a complicated 1031 transaction. 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.