All Forum Posts by: Jason Thomas

Just got the ok from a CPA.  He referenced some of the legal precedents i had mentioned above.  Also some information from John Dundon a Federally Authorized Tax Practitioner and a tax appeals specialist.  I looked him up and found this post:  https://www.taxconnections.com...

He talks about Installment sales with annuities.

Thanks Michael for your thoughts.  Yes i wish i had more time to have researched installment sales and the options available to me before getting into escrow on the rental property.  

Setting one up directly with a buyer sounds more lucrative but also sounds like it may have cons involved like foreclosure possibilitys etc.

I havn't done a NPV of the opportunity cost of deferring my gains and spreading them out with equal payments to me over a 7 year period.  I do know my tax savings by doing an annuity nets me about a 25% return over 7 year time frame with 1/7 of my gains being paid to me every year for reinvestment to further my gains.  Not a bad return over the next 7 years considering sky high stock market and real estate prices right now.  

The setup for the annuity is as follows.  Myself and the Buyer execute purchase and sales agreement with an addendum agreeing to periodic payments.  The buyer assigns periodic payment obligation and transfers lump sum to Structures (the assignment company).   Structures uses the lump sum to purchase the annuity through American Equity Life Insurance co.  matching the acquired periodic payment obligation.  American Equity Life distributes the payments to me in accordance to the schedule in the Purchase agreement.

What would be a good setup for doing this a direct seller financing deal?  Im not familair with how that would work.?  Wouldn't i be at risk for a default by the buyer with a possible lengthy and expensive foreclosure process if they can't pay.  How would this save me in capital gains if the majority is payed in a balloon payment by a refinance after 7 years?  

just researched annuity companies that go bankrupt to find out what or if any insurance or safety net is provided.  Each state has a Guarantee Association setup to back up to $250k or more of an annuity policy if their is bankruptcy.  There has been only 6 insurers since 2007 that have gone bankrupt mostly small regional companies.  That is through the financial crisis when AIG was bailed out......There is the option to maybe split the installment sale into multiple annuities to eliminate risk entirely with company default.

Also i looked up the Dems plans.  Looks like they would need to win senate and white house to get capital gains policy changes through.  Even then the policy changes for captital gains taxation increases looks to only affect inheritance step up basis and income earners of a million/yr.

Im already in escrow on this rental sale.  I only have two options of either paying all the capital gains this year or spreading it out over multiple years with an installment sale.  If i had a cash buyer i might be able to do a seller based installment sale.  This buyer doesnt have the financing to buy the home outright in a 7 year timeframe thus a 3rd party with an annuity seems like a viable option. 

The annuity presented to me is through Structures.com with American Equity Life Insurance Co. providing the annuity.  The periodic payment obligation will be assigned to Structured Assignments SCC, (SAI)  via non-qualified assignment agreement.  As i said before the annuity is a Single Premium Immediate Annuity (SPIA).  I have $650,000 after the sale that would be setup in the annuity with $500,000 being capital gains.  If i decide to not do the annuity and pay the tax this year i will owe approx $134k.  If i spread it over 7 years with the annuity i will owe $37k at worst unless of course the Democrats change the rules.  So i save about $97,000 in tax by doing this.  The interest income gained by having the annuity is only $30k.  So a total of $127k saved plus interest to me over 7 year period net fees.   

So the way I see it is if I go the route of paying the capital gains tax this year I will net around $500k lump sum after the cg tax and depreciation recapture is paid.  I would have to make more than $127k or more from this lump sum over 7 years to break even with the annuity option.  Also Id be getting payments of around $97k each year from the annuity that could be invested to possibly further the tax savings and gains of $127k.

I do realize there may be increased risk with default of the annuity or tax policy change.  I will have to find out if there is insurance or some kind of guaranteed payment if the company were to go bankrupt in 7 years.  This is obviously the most important consideration.

All your thoughts have been much appreciated as i try to decide to go further with this or not.

Thanks!

Here is a similar structured installment sale by metlife

https://www.metlife.com/conten...

https://players.brightcove.net...

Legal authority

Installment sales allowed IRC 453

Substitution of obligors is allowable

Revenue ruling 75-457

Revenue ruling 82-122

Wynne vs Commissioner

47 B.T.A. 731 (1942)

Cunningham vs Commissioner

44 T.C. 103 (1965) acq 1966-2 C.B. 4

Im feeling pretty confident that it is a legitimate way to save on capital gains tax at this point.  Hoping some of you have experience with this method and can point out any things to be aware of or tips.  My situation is that im recently retired with no more income coming in after this year.  I can structure this over a 7 year period to greatly lower my capital gains rates by taking advantage of the federal 0% capital gains bracket up to 78k.  I will still have to pay the depreciation recapture with this method.

It is setup kinda like this:  With the annuity being the guaranteed payment (installment sale) from a life insurance company as the obligor and not the buyer.  The buyer agrees to the terms of the agreement and pays the lump sum to the trust (insurance company) who then takes on the same payment structure through the annuity created.

These are supposedly the legal precedents it falls under:

I have run my numbers and it will save me alot in capital gains.  The SPIA is being setup so that I dont have to take the risk of working directly with a buyer in an allotment sale over the 7 year period and worrying about not getting paid.  I guess im more concerned that this is legitamite way to pay the capital gains over the 7 year period with an SPIA and the IRS will be ok with this method.

A financial advisor has told me about using a Single Premium Immediate Annuity (SPIA) as a vehicle to lower my capital gains with the sale of my rental property.  It is to be setup as a structured allotment sale over a 7 yr period to avoid a lump sum capital gain payout.  I don't want to do a 1031 exchange and this seems like a possibility.  Does anyone have any experience with this as a legal way to save on capital gains for rental property sale?