Monetized Installment Sale

Case Study

Deferred Capital Gains Tax

on Sale of Manufacturing Business

The Problem

The owner of a custom trailer manufacturing business had his CPA contact us because he’d seen our web site. The business had been owned for over 30 years, and the owner’s shares were to be sold for a large gain.

 

The owner wanted to know if he could avoid paying capital gains tax on the sale of his business, instead deferring the tax for 30 years and still exiting with a high percentage of the sale proceeds in cash.

Facts and Circumstances

Sale price: $8,400,000

Cost Basis: $2,360,000

Gain on Sale: $6,040,000

Long-Term Capital Gains Tax + NIIT (Nevada - 25%): $1,510,000

Proposed Solution

We recommended a monetized installment sale of the business, which would enable the owner to defer the capital gains tax and obtain cash at closing equivalent to 93.5% of the net sales proceeds.

Our approach was follows:

  1. Seller lines up a cash buyer in the usual way.

  2. We introduce the seller to a dealer who agrees to buy the business (or assets of the business, at the option of the seller) using a 30 installment sale contract, with interest-only payments and a final balloon payment of principal. At the end of 30 years the principal amount is received by the seller and the capital gains tax obligation is triggered.

  3. Upon closing of the installment sale, the dealer immediately resells the shares, for cash, to the end buyer, with all the terms and conditions that were agreed upon with the original seller remaining in force.

  4. Concurrently, we introduce the seller to a third-party lender who will make a cash loan to the seller in an amount equal to 93.5% of the net sales proceeds as stated in the installment sale agreement. The payments on this loan are equal to those made by the dealer to the seller under the dealer’s installment sale contract: interest-only payments for 30 years and a balloon payment of principal.

  5. Payments received by the seller each month under the installment sale contract are  used to make the payments from the seller to the lender, so there are no actual out-of-pocket costs to the seller, who is now also a borrower.

  6. The loan agreement states that if the dealer stops making payments to the seller, then the seller no longer is required to make payments to the lender.

Result

The seller chose to avoid capital gains tax on sale of his business (at time of sale), using a monetized installment sale to defer the capital gain for 30 years.

The seller deferred capital gains tax of approximately $1,510,000 received cash at closing of $7,854,000, or 93.5% of the net sales proceeds. This is $964,000 more cash than would have been received under a conventional sale.

How to Defer Capital Gains Tax for 30 Years

and

Simultaneously Obtain Cash

Equal to 93.5% of Your Net Sales Proceeds

(2:20 video)

Learn More

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