Mitigate Taxes Due on all Types of Investments When Sold
Many investors avoid taking a large investment gain because they wish to avoid the resulting capital gain taxes. Sometimes they continue holding until the gain becomes a loss due to market action. This mistake can be avoided if they were aware about a better method to mitigate taxes. Legal and acceptable ways to reduce or delay taxes on long-term-held investments is an important topic and goal for most investments. However, most techniques only delay or marginally reduce the taxes due on investments which are sold. Some techniques include:
- Holding for long-term tax period only reduces the tax rates
- 1031 exchanges only work for real property and not for other investments
- 1031 exchanges do not provide any liquidity, only a delay in taxes due
- IRS 453a applies to all investment types … not just real properties
- A 453a transaction allows for near full liquidity (get your cash now!)
You need to consider making an IRS code 453a transaction whenever you have a large capital gain you wish to mitigate. Although both CPAs and CFPs are employed by Serenity Wealth Management, we do not provide direct tax advice. However, we can connect you to the right people to show you how to make it happen. After watching the video, please email us at Curtis@SerenityWealthManagement.com with any questions you may have. Or set an appointment on the Calendly link below.
Delaying Capital Gain Taxes by 30 Years
An alternative to 1031 exchanges is established by IRS rule 453a and is often known as a “monetized installment sale” or a “cash forward installment sale.” In this situation, an institution facilitator (typically a bank trust account) is placed between the seller and the buyer. The buyer walks away with a finalized deal fully owning the property at closing. The seller has an installment sale arrangement with the institutional facilitator that has been fully funded by the sales proceeds provided by the buyer. The facilitator pays yearly interest to the seller for the next 30 years. Principle is not paid to the seller for the next 30 years and therefore, the capital gain is also delayed for 30 years. However, the facilitator loans about 94% of the sales proceeds to the seller. The interest charged on this loan to the seller equals the interest being paid to the seller on the installment sale so that the two cancel each other out from a tax and cash flow prospective.
The Effects of Inflation Over 30 Years Reduces Effects or Taxes
The result is a delay in the capital gain tax due by 30 years or less if you die before then. The capital gain is fixed and is no longer appreciating like in a 1031 real property exchange. Almost full liquidity is achieved (less about 6 to 7% due to facilitator fees). You have 30 years to invest and grow the proceeds before needing to pay for the future capital gain. The pain of the future fixed (not appreciating) capital gain tax will then be effectively minimized by 30 years of inflation. Plus, you should have earned significant gains on your investments to easily pay for the taxes due in 30 years.
IRS Rule 453a Can Be Used for All Types of Investments, Not Just Real Estate
Unlike a 1031 exchange, this can be used for all types of investments, an operating business, stocks, mutual funds, real property, art, gold, and others. There is no need to invest in a similar type of investment. But in order to make the interest payments on the 94% cash out loan to the seller tax deductible, the loan should be used for investment or business purposes.
Most CPAs Are Not Aware Of the Benefits of 543a
Don’t expect your CPA to be knowledgeable about this strategy. Few are. Your CPA’s lack of knowledge does not reflect on the strategy’s legitimacy. A monetized installment sale is covered in IRS regulations 453a. Remember that CPAs are known for their conservative nature and not for their easy ability to accept new ideas. If you need a referral to a tax professional who understands IRS 453a rules, just email us at Curtis@SerenityWealthManagement.com for a referral. Be certain to get knowledgeable CPA professional advice on this topic and all tax issues.
Of course, Serenity Wealth Management stands ready to help you invest the proceeds from your monetized installment sale in such a way that paying the capital gain due in 30 years will hopefully seem trivial—a tiny number compared to your investment gains received in the proceeding 30 years.
If you wish to learn more about this topic and other related personal financial topics, please check out the book The Wealth Conspiracy by Curtis Hill, available on Amazon and Kindle.
