When selling highly-appreciated assets, one of the main concerns for the seller is deferring capital gains tax. Essentially, if you sell an asset for more capital than you spent to acquire it, the government mandates that you pay tax on those gains.
Anybody who sells a capital asset needs to be aware of capital gains taxes. They do not only apply to extremely rich individuals, and they do not only apply to traditional investment purchases like stocks. If you sell your asset for more than you purchased it for, you must report those gains to the government. Assets can involve anything from real estate to businesses to personal items like collectables, cars and other forms of appreciated assets.
As such, many individuals have a great deal of interest in ways to defer or reduce their capital gains taxes, in order to maximize their profit. One way to do this is to engage in a conventional install sale. However, this approach has a number of negatives in addition to the positives.
The Advantages of Conventional Install Sales
The major advantage of the conventional install sale is that it allows you to defer capital gains taxes. The main thrust of a conventional install sale is that it involves the buyer and seller of the asset making an agreement. The buyer agrees to make payments according to the contract agreed to between the parties, rather than in a lump sum.
With this situation, you will only need to pay taxes on the amount you, the seller, receive from each payment. It is only at this point that you will realize gains, so the burden is overall smaller.
The Advantages of Structured Install Sales
Even though conventional install sales allow you to defer capital gains taxes, there is a great amount of risk on the part of the seller. For example, the buyer of the asset may let it fall into disrepair (in the case of real estate), or not manage it correctly (in the case of investments or businesses). There is also the potential for an Act of God: if you sell a rental property and Florida and a hurricane destroys it, that will affect the value of the asset.
In this instance, it is possible that the seller may end up reacquiring the asset at a loss. This is why conventional installment sales have lost popularity over the past few years, as the seller often sees the risk as too high.
The structured installment sale emerged as a superior option to the conventional installment sale. They offer the benefits associated with the conventional installment sale and deferred capital gain taxes, but significantly lower the risk.
Structured installment sales are not the answer to all situations, but many sellers find them an attractive way to defer capital gains tax and make a more-secure sale on a highly-appreciated asset. Even in the event that the seller is a high-wage earner, using a structured installment sale can significantly lower the tax burden.
Contact us today at Reef Point to learn if a structured installment sale will help you defer capital gains taxes while engaging in secured asset exchange.