All Forum Posts by: Thomas Rutkowski

Another option to consider would be a Monetized Installment Sale. This is a way to structure the deal so that the seller gets cash at closing and can defer the capital gains tax for 30 years. Lots of CA sellers are using this strategy right now.

Yes. Hypothetically, if you sold the property on an interest-only note, the capital gains and depreciation recapture would all be deferred until the final balloon payment is received. 

The better way to sell would be to use a Monetized Installment Sale. This couples the tax deferral of an interest-only installment sale with a tax-free monetization loan. The seller gets cash at closing that they can invest any way they want and the taxes are deferred for 30 years.

The important takeaway is exactly what I stated: Its a way for the seller to get cash at closing and defer the taxes for 30 years. If you want to see the nitty gritty details, I just shared them in this post for another member with a large capital gains tax problem...

https://www.biggerpockets.com/forums/51/topics/569...

 I think you misunderstood my post. The seller walks away with cash in hand and a 30-year tax-deferral. That cash is used to buy the next property.

First off, you can learn more here www.scrowcollateral.com. There are two parts to a Monetized Installment Sale transaction. Part 1 is the installment Sale through an intermediary. Its really no different from a 1031. Instead of a 180 day deferred payment, it is a 30-year interest only note. The Intermediary holds the funds and is subject to the terms of the purchase agreement between seller and intermediary. Part 2 is the Monetization. 

Your note is not collateral for the monetization loan. That would likely make the loan proceeds taxable. It is an Income-based loan. There are several very important covenants in the loan agreement. 1. the sole source of recourse is the income coming from the installment sale. This eliminates personal liability if the intermediary were to default. This is absolutely necessary since you have essentially sold the property with nothing down and interest-only. 2. The lender is prohibited from writing off the loan. This would generate a 1099-C for the seller.  3. Lender will not report a default to credit agencies.

The monetization loan will be for an amount equal to 95% of the net sales proceeds. This will be further reduced by fees and points. You should expect about ~93.5%. 

If you can find a lender willing to finance 100% of anything, please let me know!!

Addressed above.

The loan is interest only. A default impacts the lender. The lender has no recourse against you personally.

A long term escrow account is set up at closing. The monthly payments from the intermediary go into this account. The money is transferred to another escrow account where it is transferred to the lender to make the payment on the loan. All of this happens automatically every month . The only thing you need to worry about is the 1099 you'll receive for interest income. The monetization loan is a commercial loan, so as long as the proceeds are used for business purpose, this should be an expense that offsets the income.

No. The contract is interest-only. There is nothing to worry about until the last and final balloon payment is received. That is when you'll have constructive receipt and that is when the taxes will be due.

Take a look at this: http://investor.officedepot.com/phoenix.zhtml?c=94...

Its the largest known Monetized Installment Sale at $1.4 billion. If you read through carefully, you'll notice that the intermediary (Lehman) DID default on the loan after the 2007 economic crisis. As a result, Office Depot will NEVER PAY ANY CAPITAL GAINS TAX, EVER.

@Ouman You   Wow. That is some appreciation! A 1031 is out of the question because it is not an investment property. The best option would be to consider a Monetized Installment Sale. This is a way to structure your sale so that you get cash at closing and you can defer the capital gains tax and depreciation recapture for 30 years. This sales structure is pretty common in CA where property values have appreciated as you've described.

I've actually modeled this scenario. I'm sure the guys that do 1031 Exchanges would argue with me, but I think the Monetized Installment Sale (MIS) is a superior way of disposing of a highly appreciated asset.

1. Both strategies allow you to defer the taxes. In a 1031 exchange, the taxes can theoretically be deferred until you die and then your heirs get the property with a step up in basis. That doesn't help your estate if there are taxes due though. The MIS allows you to get cash at closing and defer the taxes for 30 years.

2. 1031 exchange imposes a tight deadline. You have 45 days to identify your next investment property and 180 days to close. We are in a very hot real estate market with a lot of competition for properties to make exchanges. Research shows that the prices paid for 1031 exchange properties are about 19% higher than the market. In a MIS transaction you have cash in your hands. You can take your time to find a deal that makes sense. You can sit out the hot market and wait until the time is right to buy.

3. In a 1031 exchange your cost basis and depreciation are carried forward into the new property. This reduces the depreciation you are able to take on the new investment. In a MIS transaction you can purchase the new property with the cash from your monetization loan (and lender financing). You will start off with an all new cost basis and a fresh depreciation schedule. This means more income in your pocket right now. Every case is different, but the present value of the new depreciation will likely offset the tax benefit of infinite tax deferral versus 30-year tax deferral.

If inflation is running at 2.5%, the real cost of the future tax obligation 30 years out is about 50% of what it is today. Taking the depreciation on a new property will likely make up the difference. Additionally, you are essentially holding onto the government's money for 30 years before you have to pay them. Take the Rule of 72: if you could earn 7% on that money, you could double it 3 times over. So now you have 8X what you need to pay the taxes, that in real dollars, are only half of what they are today. You get to keep 7/8ths of it. That more than makes up for the small haircut you take on the monetization loan.

 Its not that complicated. Just remember that the important thing is the high level overview I gave in my first response to your post: its a way for the seller to get cash at closing and defer the capital gains tax and depreciation recapture for 30 years. Everything else is just the mechanics of how the deal and funding is structured. I've helped many clients with this planning approach. Its not as well known as other deferral strategies, but there are lots of references and lawyers who can provide advice on it. I'm always happy to explain how it works.

 If they are not planning to get back into real estate investing right away, the best option would be to consider a Monetized Installment Sale. This is a way to structure the sale so that the seller gets cash at closing and can defer the capital gains tax and depreciation recapture for 30 years. This would let the seller sit on the sidelines while waiting to find their next deal. And they would be able to go into the next deal with an all new basis and fresh depreciation. With a 1031 your gains and depreciation are rolled forward into your next property.

@Akeem Wheatley The subject has been beat to death on BP.

https://www.biggerpockets.com/forums/519/topics/24...

It boils down to this...

If you can put your money into an asset growing at 6-8% and you can get an immediate line of credit against that asset at 4.5% (prime), then anything you can do with that borrowed money that earns more than 4.5% will be adding value on top of the original asset. That's it. Plain and simple. You'll earn a greater return doing the same thing you were going to do anyway because your money will literally be working in two places at once. A properly designed permanent life insurance policy is the underlying asset. 

Don't believe the IBC propaganda that it has to be a dividend paying, whole life company, yada, yada. This works with any properly designed permanent life insurance product.

https://www.biggerpockets.com/blogs/7595/47958-is-...

If your illustration is showing less than 85% cash value to premium at the end of the first year, the policy is not designed properly. Most IBC agents don't properly design their policies for maximum overfunding. They leave room to add paid-up additions later. This is the "interest" that you are supposedly paying yourself. 

If you want to truly put your money to work in two places at once, you want as much cash value at policy issue as you can get. By not designing the policy properly, they are fully driving out the cost of the death benefit (and commissions).