Pay Zero Capital Gains Tax at Closing!

How to Defer Capital Gains Tax

When Selling a Highly Appreciated Asset

You can sell your real estate, business, farm or other assets

and pay no capital gains tax at time of sale --

deferring your tax for 30 years

Postponing your tax for an extended time is the equivalent of a substantial present-day tax reduction.




Because you can invest the money not paid in taxes today at some favorable rate of return, and pay the tax in the distant future after accumulating a significant financial yield.

The Tax-Deferred Cash Out
Defer Capital Gains Tax
When You Sell

If you are facing a large capital gains tax when you sell your property, you may be looking for ways to avoid paying capital gains tax, at least until some distant point in the future.


There is a way to accomplish the sale of an asset you own that has grown in value so that you not only defer your capital gains tax for many years, but you also exit with cash equivalent to most of the sales proceeds. In fact, you can walk away with an amount equal to 93.5% of your net sales proceeds, tax deferred.

How to Get Cash When You Sell and Pay Zero Capital Gains Tax at Closing

If you are selling an asset such as your business, your real estate, or any other asset type subject to long-term capital gains tax (except publicly traded securities) then you should know how you can defer your tax and simultaneously receive cash at closing. This outcome may be accomplished by setting up your sales transaction in a specific way, known as known as a Tax-Deferred Cash Out, discussed below. Although it is not well-known, it is a highly effective technique that allows you to avoid paying capital gains tax when you sell and instead defer capital gains tax for 30 years.

What is a Tax-Deferred Cash Out?


A Tax-Deferred Cash Out is a way of structuring the sale of an asset so that cash equivalent to a large fraction of the net selling price (typically 93.5%) can be received at closing, while you defer capital gains tax 30 years.


This strategy can be applied to a wide variety of asset types and is a compelling alternative to more widely-known deferral techniques, such as the 1031 tax deferred exchanges and deferred sales trusts.

Other Ways to Defer Capital Gains Tax

Under the new Tax Reform and Jobs Act of 2017, 1031 exchanges can no longer be used for exchanging business assets. Exchanges now are limited to real property, and they have never been available for deferring tax on sale of primary residences or second homes.


Also, exchanges are not always the right solution for deferring capital gains tax on real estate. Sometimes real estate owners do not want to trade into another real estate investment. Instead, they may prefer to sell, defer the tax, and do something else with the  extra money.

Deferred Sales Trusts are frequently promoted as a means to sell real property while deferring gain, but these involve a significant amount of ongoing structure and costs, and they have a somewhat hazy legal standing. Deferred Sales Trusts limit the seller’s access to sales proceeds, so the assets are not liquid. For more on this subject, click here.

An Alternative Way to Sell, Exit with Cash, and Defer the Tax

For these reasons, Tax-Deferred Cash Out should be considered as an option, when the goal is a cash exit and to pay zero capital gains tax in the year of sale, instead deferring the capital gain for a long time into the future.  After all, long term capital gain taxes can be an unpleasant problem for the sellers of highly appreciated assets.


Owners of real estate, businesses, farms, collectibles and intellectual property, to name a few, are often surprised and dismayed to learn how big these tax bills can be, when considering a sale.


Not only are federal capital gains tax rates of up to 20% an issue, but many states also levy capital gains tax. In fact, combined federal and state capital gains tax rates of over 30% are a fact of life in over twenty states, with the highest combined rate in California (37.3%).

The Concept

A Tax-Deferred Cash Out combines an installment sale to a dealer (who resells the asset to the end buyer for cash) with a loan from a third-party lender. Together, these transactions let the seller defer capital gains tax and net 93.5% in sales proceeds in cash.

Think of it as a tax deferred installment sale coupled with a tax-free loan.

  • The installment sale defers capital gains tax under Internal Revenue Code Section 453.

  • The loan, provided by a third-party private lender, provides the cash at closing, and is made based on the lender’s expectation that the seller will be receiving the installment payments over time.


The terms of the installment sale agreement and the loan are usually 30 years.  The interest-only payments and final balloon payments on each are set so that they cancel each other out.


As a result, you avoid paying capital gains tax for up to 30 years, and the you receive cash equivalent to 93.5% of the net sales proceeds in cash, which you may invest as you wish.

How it Works

  1. The seller sells the asset to a dealer specializing in Tax-Deferred Cash Outs, who performs a role like that of a 1031 qualified intermediary. The seller receives an installment sale note from the dealer.

  2. The dealer resells the asset to an end buyer for cash, which remains in escrow.

  3. Simultaneously the seller obtains a loan from a third-party lending institution, introduced to the seller by the dealer.

  4. The installment sale agreement and the loan each have interest-only payments and final balloon principal payments that are sized to be equal and offsetting, so the seller never has any out-of-pocket loan payments to make. All the payments are handled automatically through a long-term escrow account.


The Tax-Deferred Cash Out is not new. In fact, it’s been used for many years and is based upon a transaction structure that numerous publicly traded companies have implemented, ranging in deferred tax from $24 million to $4.8 billion. These publicly traded companies have all reported their transactions to the SEC, as long ago as 1999, and as recently as this year.

IRS Memorandum

What does the IRS say about this? In 2012, the IRS approved a specific transaction that was structured in a way that both deferred capital gains tax for a taxpayer and enabled that seller to engage in a separate loan transaction that provided cash equivalent to a large percentage of the sales proceeds. The IRS issued a memorandum explaining the reasons that the transaction was considered acceptable to the IRS. That transaction is a model for tax-deferred cash outs provided by specialized dealers in today's market.

Who Should Consider a Tax-Deferred Cash Out?

It depends on your situation.

First, maybe you just want to get out of real estate, your agricultural property, your business, or other asset type, and you just want the cash.

Second, you may be considering a 1031 real estate exchange and you are concerned that it may not  go through, probably because of difficulties finding or closing on a replacement property within 45/180 days. If the exchange does not go through, you will end up paying capital gains tax on your next tax return. So you are open to another way to defer the tax that is less risky.

Or, if selling real estate, you may simply prefer a cash exit. Perhaps you want to reinvest in other types of assets, or you want to take more time to find replacement property than a 1031 allows.

If you are in one of these situations, and you want to sell for cash and defer your tax for 30 years, then a Tax-Deferred Cash Out could be a good strategy for you.