Structuring a Real Estate Installment Sale: Tax Benefits and Pitfalls, Depreciation Recapture

Note: CPE credit is not offered on this program

Recording of a 90-minute premium CLE webinar with Q&A


Conducted on Tuesday, May 7, 2019

Recorded event now available

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Program Materials

This CLE webinar will provide tax & finance counsel with the tools to structure installment sales of commercial real estate. The panel will examine the potential advantages and pitfalls of installment sales, and discuss the complexities that arise when dealing with monetized installment sales.

Description

Use of the installment sale as an estate planning and wealth management tool is gaining popularity. When the sale of property is done by installment payments spanning more than one year, the transaction provides numerous value-added opportunities for long-term owners of real property. For instance, the seller would create a steady stream of income over the life of the agreement, illiquid or unmarketable hard assets would be converted into monthly, liquid payments, and eliminating the risks and burdens associated with property ownership/management.

Counsel must pay careful attention to the requirements of IRC Sections 453 and 453A to qualify as an installment sale throughout the life of the agreement. The seller must not be a dealer as defined in IRC Section 453, and related party purchasers are subject to specific holding and relational requirements. Depreciation previously claimed on the property must be recaptured and reported in the sale year, which will be taxed at the applicable rate based on the type of property. The recaptured depreciation is then added to the basis of the property to calculate the capital gain, which is taxed at the capital gain rate.

A solution to the risk of a buyer default is for the seller to seek out a financial institution to participate as the unrelated third-part buyer. Financial institutions also receive valuable opportunities by purchasing real property through an installment sale transaction due to numerous investment routes where the principal will earn more interest than that owed under the agreement with the seller.

Our panel will further discuss the murky waters associated with shark advertising and other structural inadequacies likely to disqualify a sale from being treated as an installment sale under the IRC. This panel will provide guidance on how to prevent clients from becoming the subject matter of a Revenue Ruling or Treasury Memorandum.

Listen as our authoritative panel discusses the advantages of real estate installment sales and pitfalls to avoid in structuring installment transactions. The panel will also discuss the role financial institutions can play in mitigating the credit risk associated with installment sales.

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Outline

  1. Statutory requirements of installment sales under IRC 453 and 453A
    1. Sale must have "economic substance" under IRC 7701(o), not solely to avoid tax
    2. Seller must be a "non-dealer" of the respective property
    3. Related party purchasers: What constitutes a related party
    4. Unrelated third-party purchasers
  2. How a typical installment sale works
  3. Purposes and benefits of entering into an installment sale
  4. Role of bank, wealth management firm, and financial institution as an unrelated third-party buyer
  5. Factors leading to disqualification of Installment Sale treatment under IRC

Benefits

The panel will review these and other important issues:

  • What are the advantages of an installment sale as opposed to a conventional sale of real property?
  • What are the holding requirements for unrelated party purchasers under IRC Section 453?
  • How is depreciation recapture calculated in an installment sale?
  • What value can a financial intermediary earn in facilitating an installment sale?
  • When will a transaction be disqualified from treatment as an Installment Sale under the IRC?

Faculty

Dunn, Elizabeth
Elizabeth A. Dunn, CPA, P.A.

Principal
Dunn CPA

Ms. Dunn has extensive experience in a national environment as well in the Southeast. She has brought not only her...  |  Read More

Rostoff, Justin
Justin Rostoff

Atty
Klein Slowik

Mr. Rostoff focuses his practice on land use, zoning, all facets of real property law, and corporate law and...  |  Read More

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