Monetized Installment Sale

Case Study

Sale of Dental Practice

The Problem

We were approached by a CPA, representing a retiring dentist who was anticipating a large capital gains tax that would have to be paid on the sale of his dental practice. The CPA wanted to know if there was a way to mitigate the tax burden while providing some liquidity. 

Facts and Circumstances

The dentist had lined up a buyer for his practice, and was in contract to receive $2,450,000, after selling costs. 85% would be received at closing and another 15% the following year, contingent upon performance of the practice.

 

The accountant estimated the capital gain at $1.4 million, which would end up costing his client about $500,000 in capital gains tax. 

Proposed Solution

We recommended a monetized installment sale, in which the practice would be sold first to a dealer under a long term (30 year) installment note, with interest-only payments for 30 years followed by a final payment from the dealer of principal. This transaction would defer the capital gains tax under Sec. 453 of the Internal Revenue Code. The dealer would immediately resell the practice to the originally intended end-buyer for cash, and that buyer would be unaffected by the intermediate sale to the dealer. All the terms and conditions arranged under the purchase and sale agreement would continue after the sale by the dealer to the end buyer. 

Simultaneously, the dentist would be introduced to a third-party private lender who is willing to lend the dentist an amount equal to 95% of the net sales proceeds from the sale of the dental practice, less approximately 1.5% in loan fees and prepaid interest collected at closing. The net loan proceeds would then be 93.5% of the net amount received from the sale.

The monthly payments received from the dealer would be equal to the monthly payments made to the lender, and the final balloon payments at the end of 30 years also would be equal and offsetting in amount. 

The loan agreement protects the seller, who also becomes a borrower, by waiving payments to the lender in the event that the dealer stops making payments to the seller under the installment sale agreement.

Result

After consulting with his CPA and attorney, the dentist decided to go ahead and sell his dental practice using the monetized installment sale.

Since all the monthly payments and final balloon payments offset each other, the only net cash flows the dentist experienced were the loan proceeds received up front (a cash amount equal to 93.5% of the net sales proceeds) and the eventual requirement to pay the capital gains tax when it comes due at the end of 30 years.

The dentist was able to take the additional money from the sale received up front (due to deferral of capital gains tax) and invest it in his retirement fund. The loan funds received were approximately 6.5% less than the net sales amount (due to the loan being limited to a net amount of 93.5%) but the resulting loan proceeds were still $340,750 more than he would have received if he had not utilized the monetized installment sale. The dentist (and/or his estate) can enjoy the investment returns on those additional funds for 30 years, which should provide ample time to accumulate enough additional principal to vastly outweigh the tax burden, now deferred for 30 years.

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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