When you think of Section 453 of the Internal Revenue Code, what’s the first thing that comes to your mind? If you said “installment sale,” you’re right — as far as it goes.
IRC Section 453 does indeed authorize the installment sale method when selling one of your highly appreciated assets. The main benefit is that you get to defer payment of the long-term capital gains taxes you would otherwise have to pay in the year of sale.
However, just because the IRS allows you to use the installment sale method does not mean that it allows you to do so in all situations. Section 453 comes with a number of exclusions and other disadvantages.
Let’s take a deep dive into IRC Section 453 to understand it more fully.
Installment Sale Definitions
Section 453 defines an installment sale as “a disposition of property where at least 1 payment is to be received after the close of the taxable year in which the disposition occurs.”
It defines the installment sale method as “a method under which the income recognized for any taxable year from a disposition is that portion of the payments received in that year which the gross profit (realized or to be realized when payment is completed) bears to the total contract price.”
Unfortunately, what the IRS giveth it also often taketh away, or at least severely limits the applications. This is certainly true of the installment sale method. You cannot use it for any of the following sale transactions:
- Stocks and securities traded on “an established securities market”
- Assets you sell at a loss
- Assets subject to accelerated depreciation recapture, but only to the extent that the acclerated depreciation exceeds what would have been deducted if the straight line method were used.
- Any depreciable property if you are related to the buyer
Conventional Installment Sale Down Sides
As great as the tax advantages are for a conventional installment sale, there are also numerous disadvantages, including the following:
- You must finance the sale yourself.
- You have only your relinquished asset as collateral.
- You are at the buyer’s mercy if he or she defaults or decides to refinance.
The Deferred Sales Trust Alternative
Fortunately, the Deferred Sales Trust, the proprietary form of installment sale offered only by the Estate Planning Team. provides all of the advantages of a conventional installment sale with none of its down sides. Nor are there any exclusions regarding the type of asset you can sell using the DST.
How it Works
Your first step in utilizing the DST as a tax-saving strategy is to meet with the Estate Planning Team. Once its members understand the nature of your proposed sale and everything you want to accomplish by it, including not only tax deferral, but also such things as investment diversification and a guaranteed monthly income, the Team’s highly experienced tax attorney drafts your personalized and customized DST.
You then sell your highly appreciated asset to the DST, thereby relinquishing ownership of it. In exchange, you receive an installment contract (promissory note) setting forth the terms under which you will receive monthly or other scheduled payments after the Independent Certified DST Trustee sells the asset to your intended buyer.
He subsequently begins investing the sale proceeds into the types of investments that comply with your goals and risk tolerance, and of course, only with your express written approval. In addition, the DST is not limited or restricted in the types of investments that may be considered. As you receive payments per the installment contract, you pay income tax on the amounts you receive at the time you receive them. As for long-term capital gains taxes, you pay them at such time as part or all of a specific payment represents DST principal rather than interest.
That’s it! For more information, contact Reef Point today.