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Part 2: The Decision Process - Is the Structured Sale Right For You?
By mauch | January 20, 2007
Here’s part 2. So, you have decided that you are selling your business or real estate. It is now time to decide which sales and tax deferral method you should use to maximize your benefits and minimize your capital gains taxes.
Let’s go over some of the more popular sales methods out there.
- All cash sale - This is pretty self explanatory. You sell for all cash to a buyer who either has financing or cash to bring to the deal. You will be hit with capital gains tax in the year of the sale; however, you will have all of your money right now (minus your 15% capital gains of course). Costs the seller no extra cash to use.
- 1031 Exchange - This method is very popular and an excellent tax deferral and wealth building tool. Here are the cliff notes if you don’t know how a 1031 works. You sell your investment property and place the proceeds in an escrow account until you find a “like-kind” investment property to roll the cash into. However, there are several restrictions such as time that you must follow or your capital gains tax deferral is null. The 1031 is excellent for those who want to immediately roll their equity into a new property and you don’t pay capital gains until you ultimately sell and realize the gain. It often costs the seller a fee to pay for the facilitation of the 1031 exchange.
- Installment Sale - With an installment sale you sell your property or business and take your payments over a period of years. The seller may or may not take a down payment (which is taxable when received) and the rest of the balance is due by way of agreed upon payments spread out over a period of years. Payments are not taxed until received, which means capital gains tax deferral for the seller. However, the seller relies on the creditworthiness of the buyer and his/her business or property management skills. The seller is at a higher level of risk. Usually costs the seller nothing extra other than the drawing of a sales contract if one is needed.
- Charitable Remainder Trust - In basic terms, a Charitable Remainder Trust is a tax deferral tool that allows the seller to give to their favorite charity and still receive income from their gain. With this sales method, a trust is set up which receives the proceeds from the sale. While in this trust, the proceeds earn a return which can be paid to the seller. The trust is designed to give the remaining balance to the designated charity upon the death of the seller. Prior to the death of the seller, the seller can collect monthly/yearly payments which avoid capital gains tax because they are not considered part of the “capital gain”. The capital gain is still in the trust, the seller usually only collects the interest earned by the capital while invested in the trust. The key to the Charitable Remainder Trust is that the charity shall receive the money eventually or capital gains tax will be realized. So, the seller technically isn’t entitled to the equity in the trust, merely any income realized by it. Will cost the seller sometimes significant fees to use because of the involvement of an attorney and/or other professional fees.
- Structured Sale - As you know, the Structured Sale combines the best of an annuity and an installment sale. It takes the tax deferral, income stream, rate of return, and payment flexibility of an installment sale —- and —- combines it with an annuities safety, guaranteed payments, leverage capability, flexibility, rate of return, and other benefits to make it a powerful sales tool. The Structured Sale costs the seller nothing at all to use over and above the normal selling fees. We (the certified structured annuity broker) are paid by the life insurance company, which has no effect whatsoever on the pocketbook of the seller, buyer, agent, or other professional.
I know I flew through those sales and tax deferral methods, but I gave you enough to get started. If you are considering selling your business or real estate I urge you to do your own research and decide which method is right for you.
You can see how powerful the Structured Sale is when used in the right situation. So, in your search for the “perfect” sales and tax deferral method, keep the Structured Sale (Ensured Installment Sale as we call it) in the front of your mind.
If you have any questions about the Structured Sale or the other capital gains tax deferral methods mentioned above, don’t hesitate to shoot me an email or give me a call.
1-800-666-5584
Until next time..
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