Our research and findings in this article were discovered by Bellvue Rush, a global leader in wealth and advanced tax strategies. The following article is pertinent to those in possession of a major class of asset, such as private property or a business, who have the intent to sell it via a deferred sales contract or a monetized installment sale. Inevitably, you will encounter legal professionals who are promising you the moon, specifically the ability to reduce your tax liability. The catch? You may very well be walking into a pitfall that could potentially see you land in prison for tax evasion. If something like this really happen, contact with the experts from taxbite team who knows how to handle such type of situation very well.
The IRS specifically lists these transactions as Monetized Installment Sales/ Differed Sales Contracts, essentially prohibited (and listed as part of their “Dirty Dozen”) as the inappropriate use of the installment sales rule (Section 453 of the IRS Code) by a seller who, in the year of a sale of property, effectively receives the sale proceeds through purported loans. Typically, a seller would purport to sell the appreciated asset to the buyer for cash and then purport to sell the same property to an intermediary in return for an installment note. Moreover, the intermediary then purports to sell the property to the buyer, thereby receiving 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.
Beyond the illegality of this transaction, the seller is not going to benefit financially. Why not?
The purpose of a deferral is not wanting to pay taxes today for the sale of an asset. Long-term capital gains are currently taxed at 20%. Let us assume that you wish to sell your business at a profit of $1 million. As such, $200,000 will be owed to the IRS. Of course, you do not wish to part with such a sum of money, and this is where potential complications may arise. Either on your own or through word-of-mouth, you find out that there are attorneys who can allow you to take advantage of programs that will divide the profits of the sale over ten years, whereby you are now declaring $100,000 a year. In theory, you should be paying lower taxes (as your earnings are lower), yet when combined with your other earnings, you still find may yourself in the highest tax bracket.
Moreover, whereas the tax rate currently sits at 20%, there are no guarantees that it stays this low. Government spending has a tendency to increase, which will inevitably lead to higher taxes. Where will it be when it’s time for you to pay? There is no telling, yet one thing is for certain: if you are trying to avoid paying the 20% rate, then you most certainly don’t want to pay more than that, whatever that may end up being.
So what is the answer to your conundrum? Section 643 of the IRS Code is the key, allowing you to sell ANY asset without having to pay either short or long-term capital gains. For more information, click the link and remember, knowledge is power.