All Forum Posts by: Jeff Glass

If the seller really prefers a cash exit, another option he may consider is a Monetized Installment Sale. It's a simple alternative that would defer capital gains tax for 30 years and would enable the seller to exit for cash. He would receive about 93.5% of the net sales proceeds in cash at closing.

This option would not defer the depreciation recapture tax, which as mentioned above, may be significant. It might be a good idea for the property owner to review this idea with their tax adviser. It's a simple calculation to perform. Depending on the relative amount of accumulated depreciation vs. gain due to price appreciation, the monetized installment sale looks better or worse as an alternative.

It's also important to consider the transaction size. Monetized Installment Sales are mainly useful for deals of $1million or more.

I'm sure the 1031 exchange specialists will have some good advice. I will add this in advance -- you might consider a Monetized Installment Sale as an option for deferring gain on sale and giving you the option of getting cash at closing. You then can use that cash to invest in other real estate, as with an exchange, or you could use the funds to invest in something other than real estate. You would get 93.5% of the net sales proceeds in cash at closing, to invest however you like, and your capital gains tax would be deferred for 30 years.

Another option would be a Monetized Installment Sale. The gain would be deferred for up to 30 years and the seller would be able to obtain about 93.5% of the sales proceeds in cash at closing. Even if one is "comfortable" paying the capital gains tax, it may be smarter to defer the gain since the cash that otherwise would be paid in taxes (and gone forever) can instead be invested.  The present value of the future capital gains tax is probably quite low in comparison to the value of the cash invested in something with upside. 

There is a calculator on my firm's website that compares a cash sale to a monetized installment sale. As far as I know it's the only one of its kind, although I'd be pleased to see any others that someone can point to.

We have created a spreadsheet calculator that compares an exchange scenario to doing a monetized installment sale instead. That is not on the web site but it you private message me I can share it with you. 

Between those two calculators you would have answers to your questions 1, 2 and 4. You can back in to the answer for question 3 can be answered with some simple arithmetic.

You might also consider a Monetized Installment Sale. You did not state the amount of your potential sale, and it would have to be of sufficient size for the MIS to make financial sense (generally a sale price of $1 million or more), but the sale price could be smaller if your property has experienced a large amount of appreciation and your gain/ capital gain tax would be relatively large.

If it does pencil out for you, what you get is 93.5% of the net sales proceeds in cash, which you may invest as you wish. You defer your capital gain for 30 years. You are free from any deadlines.

You can do a Monetized Installment Sale on a primary residence. In this case, if the gain after exclusion is about $700,000, and assuming the sale pushes them into the top tax bracket (federal and state), or roughly 33% cap gains tax, the a MIS would save the seller about $118,000 in capital gains tax (deferred for 30 years). That's after considering that the net proceeds from the MIS would be less than 100% (93.5% is more like it).

When doing a MIS on a primary residence, the first think to consider is whether the proceeds will be used for a business purpose, because the monetization loan is considered a business loan (by the lender, and by the IRS). That enables the interest paid on the loan to be tax deductible. Sometimes I see sellers of primary residences putting the proceeds from their MIS loan into things that are unquestionably "investments," and there's no problem with that at all. 

If the seller uses the proceeds of the monetization loan for consumption purposes (including buying a primary residence, which in itself would not be considered a business purpose as it is personal property) then it's more difficult to see how one could justify the interest writeoff. 

However, there is a possible workaround. Under the right circumstances, I've seen sellers form a business entity (LLC) to buy their new primary residence, and then the LLC rents the property to the owner of the LLC. This would not be recommended for the everyday Mom and Pop seller but is something that can work for clients that are accustomed to investing, using business structures, and have the discipline to maintain the structure over time.

A DST is a real thing. It is a way to defer capital gain. It's best when you want to exit your present investment and put your funds into a trust with a basket of investments managed by a professional investment advisor. The trust must be overseen by a third party trustee, for which you will pay a significant amount each year. You have freedom to invest as you wish, but most likely you will not have complete access to the funds as DST investments tend to be relatively non-liquid.

Another approach you may consider is even less well-known than the DST. It's called a Monetized Installment Sale. With this, you can sell your property and obtain 93.5% of the net sales proceeds in cash at closing, and the capital gains tax is deferred for 30 years. It is often used as a backup plan for 1031 exchanges that end up failing due to not being able to meet one of the two deadlines. If you have an MIS backup plan in place, you can quickly convert your exchange to a Monetized Installment Sale before your exchange dies. Then you can take your cash and shop for replacement property without worrying about those 1031 deadlines. That may help you to be in a better negotiating position when you make offers, and you probably will feel less stress.

With the MIS, you can also basically create your own DST, without the trust, the trustee, and the fees, so you can invest with complete freedom.

Rhonda,

A Monetized Installment Sale fully defers capital gains taxes for up to 30 years while providing you with 93.5% of the net sales proceeds at closing. You can invest that cash as you please, including putting it back into real estate if you wish, without the time deadlines associated with 1031 exchanges. Or you can put it in a balanced portfolio of investments that you select, with or without a paid financial adviser. It's up to you.