Why are IRAs popular retirement savings vehicles? It’s because they allow you to defer income tax so that you have more money to invest and put to work for you. With an IRA, however, you can only save up to $7,000 a year and you have to wait until retirement to withdraw the money without penalty.
What if you could essentially put the cost of your business into something like an IRA but have the flexibility to access the money before retirement? That may sound like a dream, but it’s not. If you have an asset to sell, like a business or real estate, then you can do just that with an intermediated installment sale.
How An Intermediated Installment Sale Works
An intermediated installment sale can be used to defer taxes and protect assets when selling a valuable asset. The first step in the process is deciding to sell and finding a buyer. You then negotiate the sale of the asset and the buyer arranges their financing for the purchase.
Once the terms of the sale are settled, you create an Intermediated Installment Sale Trust with an attorney. Name an independent trustee to administer the trust and oversee the investments. This is the vehicle that will function like an IRA.
Next, you will sell the asset to the trust. The trustee will buy it from you for the price and terms that you negotiated with the buyer. In exchange, they will deliver you a promissory note. Now the trust is your debtor.
Once the trust has bought your asset, it will turn around and sell it to your buyer under the same terms. The trustee will invest the sales proceeds with the help of a financial advisor, much like you would invest the funds in an IRA account.
The trustee administers the trust, oversees the investments, and handles buyer relations as needed. Most importantly, they start to pay back the debt that they owe you. They will pay out the proceeds to you over the span of years specified in the promissory note and you will owe no capital gains taxes until they make the payments. In that way, you can invest the proceeds of the sale tax-deferred.
Benefits Of An Intermediated Installment Sale
An intermediated installment sale is an alternative to an outright sale. As discussed, the major benefit is the ability to defer the capital gains taxes on the sale of an asset for 15 years after the sale and tax engineer your monies to a much lower tax bracket. That allows you to both benefit from inflation and invest the full pre-tax sales price. Having more investable cash will increase the income generated.
In addition to the tax benefits, having the sales proceeds in a trust protects the assets against creditors and lawsuits. Also, since you are not holding the note for the buyer, you eliminate the risk of poor buyer management leading to a default on the note. Finally, many sellers prefer to receive payments over a span of years instead of all at once for cash flow management purposes.
How I Can Help
If you have a business or real estate to sell, you should consider utilizing an intermediated installment sale. By spreading the delivery of the income from the sale over the life of the installment note, it defers payment of capital gains and can provide greater financial benefits compared to payment of taxes in the first year of the sale. If you think an intermediated installment sale may be a wise move for you or you have more questions about them and how they can benefit you, call me at (949) 631-3840 x2 or email jbang@cfiemail.com.
About Jim Peters
Jim Peters is an independent financial advisor and the founder of Grace Wealth Management Group, Inc., a full-service financial firm committed to helping people pursue their financial goals. With more than 24 years of experience in the industry, Jim combines his extensive knowledge with his genuine interest in helping people pursue financial independence. Beyond his experience, he is certified as both a Chartered Life Underwriter® (CLU®) and Chartered Financial Consultant® (ChFC®), meaning he has advanced training and knowledge in financial planning and insurance. Based in Irvine, California, Jim specializes in working with individuals, families, and businesses throughout Orange County. To learn more, connect with Jim on LinkedIn or visit www.financialadvisorirvine.com.