Monetized Installment Sale

[Cj McDougal]

Does anyone have experience with the Monetized Installment Sale approach? and or TaxWealth.com?

Thanks

[Thomas Rutkowski]

Originally posted by @Bill Exeter:

Hi @Tien Ly, 

It is just a relatively new tax-deferral strategy and there is only one tax court case and one IRS Advisory ruling on the strategy, so most advisors are still concerned about what the IRS's position and approach will be.  

It also triggers your taxable gain, but merely defers it over 30 years.  The taxable gain will be paid at the end of the 30 year deferral period, while the 1031 Exchange allows you to continually defer the tax and then the investor generally receives a full step-up in cost basis upon their death so that the taxable gain completely disappears.  

A careful present value of the two strategies would need to be made based upon a specific investor's circumstances, goals and objectives to determine which would be best for them.  

Personally, I do not want to leave a future taxable gain to my family. 

It is not a new strategy. It's been around for at least 25 years that I know about. The clients I know who have done this have hired a tax attorney to write a legal opinion letter. I've read the opinion letters, and while I'm not an attorney, the strategy seems legally sound to me. It is simply an installment sale. And because of the fact that it is done through a qualified intermediary, the depreciation recapture is deferred for the same reason that it is in a 1031 exchange. 

The only area that it seems the IRS could really rule on is whether the monetization loan violates the pledge rule. And since the loans are not secured, that seems unlikely. 

The advantage for utilizing this approach is not perpetual tax deferral. A seller will do this because they want cash in their hand. Maybe they're tired of investing in real estate and would rather put their money elsewhere. 30 years of tax deferral lets you hold onto the government's money for 30 years. If I invested $100,000 at 7.2% for 30 years, it would turn into $800,000 (Rule of 72). At the same time, inflation would have reduced the tax cost in real dollars about 50%. Conversely, if I set aside $12,500, it would grow into enough money to pay the future tax bill. The seller would have 7/8ths of their tax cost to re-invest. I recommend that my clients use life insurance to plan for the future tax obligation: either there will be a death benefit to pay the tax or there will be cash value that can pay the tax.

Even if the seller chooses to remain in real estate, when they buy their next property, they will start off with a fresh depreciation schedule. The present value of the new depreciation will outweigh the benefit of infinite tax deferral for some sellers. 

The investor does not receive a step up in basis. The investor's heirs receive the property with the step up in basis. When the investor dies, the value of the property at that time is included in their estate. So if their estate is subject to estate taxes, the heirs may be forced to sell the property just to pay the taxes (assuming they made no other plans).