If you have a major asset class you are looking to sell, a business, a piece of property or the like and you were thinking about doing a deferred sales contract or a monetized installment sale then you are going to definitely want to read this article and completely steer yourself away from any legal professional that is offering this as a service to you in a way to somehow reduce your tax liability by walking you right into the lion’s den where you will find yourself in a situation of potentially going to jail for tax evasion.
The IRS lists on their site this program as Monetized Installment Sales/ Differed Sales Contract. These transactions involve the inappropriate use of the installment sale rules under section 453 by a seller who, in the year of a sale of property, effectively receives the sales proceeds through purported loans. In a typical transaction, the seller enters into a contract to sell appreciated property to a buyer for cash and then purports to sell the same property to an intermediary in return for an installment note. The intermediary then purports to sell the property to the buyer and receives the cash purchase price. Through a series of related steps, the seller receives an amount equivalent to the sales price, less various transactional fees, in the form of a purported loan that is nonrecourse and unsecured.
Not that you would want one if you actually knew in addition to having issues being unlawful will not actually help you financially to get one. Let me explain.
The whole reason you defer is you do not want to pay the taxes today associated with the selling of the asset. Today long-term capital gains are 20%. In an example lets pretend we are going to sell a business you have owned for decades for $1 million dollars profit. This would cost you $200,000 in taxes with very little you can do to reduce what is due and owning to the IRS. So, you call a chop shop law firm offering one of these programs where they state they will defer the profits of your sale over the next 10 years at $100,000 a year. The idea is that you will somehow pay less yet when the $100,000 joins your other income you are at the same tax bracket, the highest one we have. And that is just now, what happens when taxes need to be raised to cover all the money government is spending because unlike what is said, the U.S. Government does not create anything. Citizens create and the Government taxes to pay for things especially many things we do not necessarily want. So, you don’t like paying taxes at 20% but when the rate goes to 35% for example you are going to love it? Do not be ridiculous to think this will not happen because it needs to happen, or our future generations are in big trouble.
The answer to selling your assets instead would be to use Section 643 of the Internal Revenue Code that will allow you to sell any asset regardless of what it is without having to pay short or long term capital gains including your business or that piece of property you own. See the link before and educate yourself and remember to always know before you go.
