The Biggest Tax Bill

Worried About the Biggest Tax Bill of Your Life? Here’s Your Capital Gains Rescue Plan!

Selling a big-ticket asset like real estate or a business can sock you with the biggest tax bill of your life. The top rate on capital gains is up to 20 percent; the new “net investment income tax” is 3.8 percent, and state taxes can eat up 13.3 percent more. Depending on where you live, that means the government confiscates up to a third or more of your hard-earned gain!

How can you avoid that bill? Charitable trusts avoid tax on that gain, but mean giving away the principal or the income from the proceeds. Section 1031 exchanges defer tax on real estate gains, but force you to re-invest the proceeds into a “like-kind” property and impose tight deadlines for identifying and closing on a replacement. Are there any alternatives that don’t force you to give away your legacy or re-invest in an asset that you may no longer want?

Now you can take advantage of a little-known strategy to cut the effective cost of selling your asset valued at $500,000 or more to as little as 6.5 percent. It’s a monetized installment sale, and it uses a third- party dealer in capital assets to defer receiving sale proceeds (and the tax on those proceeds) for up to 30 years. It’s based on tax code rules dating back to 1913 and supported by a 2012 IRS memorandum.

Deferring tax is great, but you probably want the proceeds from your sale now. So, with this strategy, a third-party financial institution can lend you a non-taxable amount equal to 95% of the sale price (93.5 percent after loan-related costs). You can re-invest those proceeds or spend them however you like.

At the end of the installment period, the Dealer will pay you the agreed selling price that will provide you the money to repay the loan, and you’ll pay the tax with significantly discounted dollars.

The beauty of this strategy is that it offers significant estate-tax advantages.

How? The seller transfers the asset to the dealer in exchange for lump sum payment of the purchase price payable in 30 years. The dealer simultaneously transfers asset to the buyer in exchange for agreed-upon price. Then, the third-party lender extends nontaxable cash equal to 93.5 percent of sale amount to seller. After 30 years, the dealer pays the agreed sale price, the seller uses that money to repay the loan, and the seller pays tax with discounted dollars.

While this strategy may seem fairly straightforward, for most if will require the assistance of a tax professional.

Paul Dion CPA is the owner of Paul Dion, CPA (www.PaulDionCPA.com), with offices in  Millbury, MA and Newport, RI. For a free copy of his book, “The Ten Most Expensive Tax Mistakes …that cost Real Estate Agents Thousands” contact Paul Dion CPA, via Info@PaulDionCPA.com or (508) 853-3292.