• Jeff Glass

Are Tax-Deferred Cash Outs Legal?

Updated: Jul 10, 2021

We don’t provide legal or tax advice.

That said, we are often asked about the legal basis and tax compliance status of tax-deferred cash outs.

In 2012 the IRS published a memorandum that sheds light on the subject. In that memorandum the IRS reviewed a transaction that is similar to the types of tax-deferred cash outs we see being done today. The IRS considered various tax and legal principles, including the Economic Substance doctrine, and the step transaction doctrine. Neither were considered at play with the transaction they reviewed, so they approved that particular tax-deferred cash out.

While that memorandum can be considered a form of guidance, it is not conclusive, and technically can’t be used a precedent. So, the question remains, is a tax-deferred cash out legal?

One of the attorneys our clients use when conducting their monetized installment sales has written on her web site that, in her view, tax-deferred cash out are OK. Here’s an excerpt:


“Are tax-deferred cash outs legal? In short - Yes. The rules which Congress put into place allow sellers of agricultural properties and homes to sell on installment contracts and at the same time borrow money, with the loan being secured by the installment contract. In the case of installment sales of business or investment property, Congress said that the installment seller could enjoy tax deferral and still borrow money elsewhere at the same time, as long as the loan which the seller takes out is not “directly secured” by the installment contract or the lender does not take the installment obligation in satisfaction of part or all of the loan to the seller.

Additionally, the IRS Office of the Chief Counsel issued a memorandum (memo number 20123401F) on Tax-Deferred Cash Outs in 2012, blessing this structure."


If you want to hear more from this attorney and why she believes tax-deferred cash outs are legal, you can contact us for a referral. During the discussion the attorney discusses her interpretation of the law, what is considered "gray area," and the favorable experiences her clients have had after their mtax-deferred cash outs have been audited by the IRS.


How to Defer Capital Gains Tax for 30 Years and

Simultaneously Obtain Cash Equal to 93.5% of Your Net Sales Proceeds​ (short 2:17 min. video)

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