The Monetized Installment Sale is a unique tax deferral strategy that allows the seller of “property” to defer capital gains taxes for 30+ years while receiving sale proceeds today.
What’s is considered property?
Real estate, bitcoin, timberland, and your uncle’s prized Ferrari are all considered property and can be sold via a monetized installment sale. Stocks, securities, or anything traded on an established securities market are not eligible to be sold using this strategy.
Who are the players?
There are four players that are required to execute a monetized installment sale.
How Does it work?
1. Seller sells property to Dealer on an installment contract
After a Seller finds a Buyer for the sale of property, a Dealer is inserted between the two parties to facilitate the monetized installment sale. Like a traditional installment sale, the Seller sells property to a third-party Dealer in return for a 30-year, interest only installment contract.
2. Dealer sells property to Buyer
At no mark-up, the Dealer sells the property to the Buyer in an all-cash, fee-simple interest sale.
3. Lender issues Seller a 30-year, non-recourse, interest only investment business loan
An unaffiliated lender provides the seller with an unsecured loan in the amount of the sale price (not including fees – brilliance isn’t free). The loan has special characteristics that protect the seller from the bank.
- Single Source Provision: The Lender cannot compel the Seller to pay more on the loan than the monies deposited into the Seller's escrow from the Dealer
- Loan Guarantee: Guarantee to the Seller that the Seller will not have to repay the loans from monies other than those from the Dealer desposited into the Seller's escrow
- The Lender cannot report any non-payment to a credit reporting agency
4. A series of escrows ensure note repayment from installment proceeds in a smooth, low maintenance process
Monetized Installment Sales are low maintenance. A series of escrows setup at inception automates the loan payment process.
The Dealer's note and Lender's note offset, and the Seller walks away with monies equivalent to the sale proceeds of the property disposition (less fess). No capital gains tax is paid until the loans are unwound, and the lender can't pursue the Seller for non-payment!
Seems too good to be true – Is this legal?
Yes! The IRS issued a Memorandum from the Office of the Chief Counsel on Monetized Installment Sales in 2012, blessing the structure.
Who else has done this?
Many investors and businesses have taken advantage of the tax deferral power of the structure. The following companies have executed Monetized Installment Sales that range from $24 million to $4.8 billion in size.
Contact Kastelberg Real Estate to learn more about capital gains tax deferral solutions!