It goes without saying that real estate investors should position themselves properly tax wise when selling at a profit any real estate property including: a personal residence, second home, or an investment property which typically qualifies for a 1031 Exchange. The less you pay in taxes now equals more wealth that you can use to build for the future. Like a penny saved is a penny earned, a tax obligation deferred now becomes an asset that can be used to increase the investors net worth. Tax Deferred Sales, LLC proprietary Installment Sale Purchase transaction is similarly a wealth creator. TDS likes to best best describes this most important characteristic of its transactions as “Delaying Taxes into the future is better than paying taxes immediately”.
The question at hand is what is the most effective tax deferment method that provides the Seller the most flexibility to determine and achieve their tax deferral objectives and reach their cash flow needs? There are a few choices actually. The one that comes to mind when most people think of deferring capital gains taxes on investment property is the 1031 tax deferred exchange.
Although this is the most popular tax deferment method, there are quite a few challenges that are associated with it. For example, if you sell an investment property under a 1031 exchange you must identify a “Like Kind”) replacement property within 45 days of your sale. In addition, you are required to invest the entire proceeds from your sale into the replacement property, which means you cannot receive any cash from the transaction. Last but certainly not least, you need to close on the purchase of the replacement property within 180 from your sale.
Purchasing investment property is the largest investment that many people make. Under the 1031 exchange restrictions, you are forced to complete the entire process within a six (6) month period. That is simply not enough time to find a property to purchase, conduct your entire due diligence, financing process including bank approval and property appraisals and then to actually close on the property for many real estate investors. When you add the fact that the economy is currently shutdown, it makes this even more difficult to achieve during these challenging economic times. Also, many Buyers are simply not willing to purchase in fear of what they acquire will lose value in the immediate future. On the other hand, the Installment Sale process is just as effective at deferring taxes, but is considerably easier to execute and often will provide a low tax consequence while providing greater flexibility for the Seller of appreciated assets or the real estate investor facing a failing 1031 transaction scenario.
In essence, you sell your investment property to an entity that specializes in Intermediary Installment Sales. The intermediary resells the property to your buyer. The intermediary pays the proceeds from the sale directly to you, however the payments are made in installments at a rate of one payment per year. You are responsible to pay the taxes on the yearly installments as they occur instead of paying the taxes at one time on the entire amount of the proceeds. For example, you make a $1,000,000 profit on the sale of an investment property.
Instead of paying capital gains taxes on that $1,000,000 you receive installment payments of $50,000 for the next twenty (20) years. You end up paying taxes each year on the $50,000 installment only, deferring the taxes. You can then use that $50,000 per year, minus taxes, to make other investments that will help build your wealth. Often paying all the taxes up front will be more than the payment of taxes over time and delaying the negative tax impact with a Tax Deferred Sales, LLC Installment Sale will in most instances increase the Sellers’ over all current net worth.
If you need help with an Installment Sales transaction in California, please contact Tax Deferred Sales today. TDS has specifically developed a proprietary tax expertise Installment Sale structure to save failing 1031 exchange transactions and to delay taxes on the sale of other highly appreciate assets. 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 Paul A. Conte, a LLM tax attorney with over 20 years tax deferral experience and expertise with a singular focus on assuring sellers delay of taxation.