You own highly appreciated assets like a business, real estate or other asset class. You would like to sell it but do not want to pay the heavy capital gains tax in a taxable sale. You have considered a 1031 exchange if you own real estate but are tired of managing real estate assets. What can you do? Consider the IRC Section 453 Installment Sale strategy featured in our new video. Using IRC Code Section 453, you can create a special trust, called a Non-grantor trust (NGT) which is treated as a separate taxpayer. You then sell the asset to the trust for a 25 year interest only installment note at the government stated AFR rate (1.46% for February 2021). The asset must remain in the NGT for a period of not less than 2 years after which time, the asset may be sold.
The trust’s tax basis is equal to what it paid you for the asset and so at sale the capital gain is based on the sales price less the trust’s tax basis, not your basis before you sold the asset to the trust. Cash is paid to the trust on sale and the trustee invests the entire proceeds for the next 23 years before the note due you is due to be paid. Then you recognize the gain at that time, some 23 years hence. Imagine what your investment professionals can grow the trust’s investment funds to before the gain is going to be taxed, perhaps by a factor of 4x, 5x, or more?
The video describes the strategy at a high level. Feel free to contact the firm if you would like to have more information on this strategy.