Monetized Installment Plans?

33 Replies

Looking at alternatives to offset or defer capital gains. Yes I know about a 1031 exchange so that remains a viable option. But I’d like to have more freedom with the monies such as buying on auctions or other investment strategies. Anyone done a Monetized Installment plan can share their experiences?

@Gary, I will let other chimes in at the Monetized question. 

Another great way to actually defer the capital gain and also walk away with cash is investing in the Qualified Opportunity Zones. 

This is a new provision added by the tax reform. 

Unlike 1031, you dont have to invest your entire proceeds to defer the gain. You can invest only the gain part from your sale, and keep the basis to reinvest the way you want at the auction. 

The gain you invested in the OOZ will not only be deferred but also avoid 15% tax on the cap gain that you reinvested. 

If you happen to make more gain on the cap gain that you invested in the OOZ, the additional cap gain in your reinvestment will be permanently avoided if you hold your reinvestment in the OOZ for 10 years. 

That is high level overview, something you want to bring up when talking to your professional. 

Good luck. 

Originally posted by @Ashish Acharya :

@Gary, I will let other chimes in at the Monetized question. 

Another great way to actually defer the capital gain and also walk away with cash is investing in the Qualified Opportunity Zones. 

This is a new provision added by the tax reform. 

Unlike 1031, you dont have to invest your entire proceeds to defer the gain. You can invest only the gain part from your sale, and keep the basis to reinvest the way you want at the auction. 

The gain you invested in the OOZ will not only be deferred but also avoid 15% tax on the cap gain that you reinvested. 

If you happen to make more gain on the cap gain that you invested in the OOZ, the additional cap gain in your reinvestment will be permanently avoided if you hold your reinvestment in the OOZ for 10 years. 

That is high level overview, something you want to bring up when talking to your professional. 

Good luck. 

 Wow, this sounds amazing.  I've also heard of the Delaware Trust method, a little known vehicle also. But this sounds even better.  Know anyone with more experience? I'll start a new thread for this topic.  Thanks a bunch, Ashish

A qualified opportunity fund must invest at least 90% of its assets in qualified opportunity zone property, which is defined to include (i) qualified opportunity zone stock (in a qualified opportunity zone business), (ii) qualified opportunity zone partnership interest (in a qualified opportunity zone business), or (iii) qualified opportunity zone business property (used in a trade or business of the qualified opportunity fund). 

@Gary F. , I recently sold a highly appreciated rental property in the Bay Area (CA) last year using the Monetized Installment Sale approach. This deal structure let me get cash at closing and defer the capital gains and depreciation recapture for 30 years. This gives me flexibility in choosing "where" to invest, and not stuck with another real estate purchase in a red hot market (which is what a 1031 will force you to do).

@Gary F.

I've advised on a few monetized installment sales -- one quick consideration: I haven't found a monetized installment sale dealer who will do a deal that is less than $1 million. If less than $1 million, opportunity zones might be your best option.

Good luck!

We will go below $1 million on a monetized installment if the numbers make sense for the client and for us. There needs to be a significant benefit for the client, which can be the case if the capital gains tax to be deferred is a high percentage of the sale price.

Originally posted by @Tyler Kastelberg :

@Gary F.

I've advised on a few monetized installment sales -- one quick consideration: I haven't found a monetized installment sale dealer who will do a deal that is less than $1 million. If less than $1 million, opportunity zones might be your best option.

Good luck!

 My home would probably sell for $1.1M+.  How would this work? How much would I freely be able to pocket and how much in fees?  I'm trying to weigh my options vs paying the cap gains, vs. 1031 vs. doing a Lease Option.  

@Gary F.

Gary: You'd net ~93.5% of your net sale price (after realtor fees). The 6.5% that you forgo includes legal costs to execute the monetized installment sale and transaction fees.

My 2 cents:

1) Monetized Installment Sale - Great if you want to liquidate your real estate and invest in other assets

2) 1031 Exchange - Great if you want to re-invest in real estate (and can find a new deal to buy)

3) Lease Option - I'm not terribly fond of lease options because you "cap" your upside and simply defer the decision to do a monetized installment sale or 1031 exchange to the future

@Tyler Kastelberg Thank you With the MIS how much in fees would I pay? Of course if it’s close to the cap gains then it might not be the best route. With both the 1031 and MIS I’m committed to reinvesting the capital. So maybe the Qualified Opportunity Zone could work. But then I read that 95% (?) of the assets (the sales price of my home, I believe) would have to be in an OZ. I don’t want nearly all of it in one area. With the LO I’d still have to 1031 or MIS to defer gains but at least it gives me some thinking time. I also make some cash flow and have the tax benefits while it’s being leased. And the leasee might not exercise the Option to buy, which is great because I keep the house. I’m really leaning towards the LO. Hearing these opinions and experiences are super helpful. Keep them coming.....

@Gary F.

Don't hold me to this number, but I believe the fee is circa 5% of the net sale proceeds.

If you go with the lease option route, you might consider setting the option price as a floating number based on the market at the time the option is exercised (95% of new appraisal, etc.)

Originally posted by @Tyler Kastelberg :

@Gary F.

Gary: You'd net ~93.5% of your net sale price (after realtor fees). The 6.5% that you forgo includes legal costs to execute the monetized installment sale and transaction fees.

My 2 cents:

1) Monetized Installment Sale - Great if you want to liquidate your real estate and invest in other assets

2) 1031 Exchange - Great if you want to re-invest in real estate (and can find a new deal to buy)

3) Lease Option - I'm not terribly fond of lease options because you "cap" your upside and simply defer the decision to do a monetized installment sale or 1031 exchange to the future

 Just to be clear, the 6.5% is not a "cost". It does not include legal fees as you state. There is a 3d party lender making the monetization loan. The 93.5% is simply the maximum amount that they will loan. It is not a risk-free transaction for the lender. There is no collateral securing the loan because that would violate the "pledge" rule.

Originally posted by @Tyler Kastelberg :

@Thomas Rutkowski

Thomas: I've had it explained to me as a 1.5% lender origination fee, and 5% dealer fee for facilitating the transaction. Am I incorrect to call it 6.5% of fees? Are you going to give me back 5% of the sale proceeds in 30 years?

 The first part is correct. The loan is for 95% and there are 1.5% in loan origination fees. There is no 5% dealer fee taken out of the loan. Again, just as a bank maintains an LTV ratio, the third-party lender in this case will not loan 100% of the contract value. This is the "monetization" part of the monetized installment sale. You have to compare the monetization loan and the 30 years of tax deferral to paying the taxes in the year of the sale. If you are better off, do it. If not, don't.

The installment sale will proceed for 30 years. You'll receive interest-only for 30 years and at the end you will get a balloon payment with enough to satisfy the loan. THAT is where the qualified intermediary/dealer takes their fee. You agreed to this on the sales side of the transaction, not on the monetization loan side. A 5% fee taken 30 years in the future. The loan is what it is. If you can find a lender willing to do a 100% loan, please let me know!

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