Using a Monetized Installment Sale to Defer Taxes on the Sale of Select
Appreciated Property Draws IRS Attention
Let’s say that someone wants to sell appreciated property, get the proceeds now, however, not pay the taxes for an extended period. Such a transaction would involve another person that is selling the appreciated property that is acting on the seller’s behalf, who identifies a buyer who’s willing to acquire the property in exchange for cash or other property. The seller then agrees to sell the property to an intermediary in exchange for an installment obligation involving interest payments from the intermediary to the seller.
Next, the seller transfers the property to the intermediary, but the intermediary takes title to the property only for a short time before transferring title to the buyer in exchange for the buyer’s money or other property. The seller also gets proceeds from a loan equal to the sales price with an agreement that offers interest payments from the seller to the lender equivalent to the interest paid by the intermediary to the seller under the installment obligation.
The installment agreement and the loan involve interest due over the same periods, with the principal due in a balloon payment at or near the end of the term of the installment agreement and loan. The sales proceeds received by the intermediary from the buyer, minus some fees, are given to the lender to fund the loan to the seller or they’re transferred to an escrow account for which the lender is a beneficiary.
The lender agrees to repay the amounts to the intermediary throughout the term of the installment obligation. The seller then treats the sale as an installment sale under Section 453 of the Tax Code on the income tax return for the year of the supposed sale and postpones recognition of the gain until the year in which the seller gets the principal balloon payment.
What the IRS Thinks About Monetized Installment Sales
The Internal Revenue Service and the Treasury Department want to curb the use of some types of monetized installment sale transactions by listing them as potentially abusive tax dodges. They have issued proposed regulations identifying them as “listed transactions” that need to be reported to the IRS, or else participants in them and their advisors could face penalties. IRS regulations provide that a taxpayer must disclose listed transactions on their tax returns by filing a disclosure statement (Form 8886) with their tax return. In addition, the IRS included monetized installment sale transactions on its Dirty Dozen list of common tax scams and schemes. We anticipate the IRS issuing final regulations before the first quarter of 2024.
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The information presented here should not be construed as legal, tax, accounting, or valuation advice. No one should act on such information without appropriate professional advice and after a thorough examination of the particular situation.