Serving Greater Virginia

Installment Sales Trust (tm): A 1031 Exchange Alternative

Do you no longer want to be stuck in the 1031 exchange, real estate cycle? Would you rather the sale proceeds be invested to work for you and your financial future? An Installment Sales Trust (IST)™ can be an alternative to typical 1031 exchanges for deferring capital gains taxes on highly appreciated commercial and residential real estate.

Generally, many owners of residential and commercial real estate exposed to large capital gains taxes upon sale have only heard of the typical 1031 exchange options which involve selling property and buying another “like kind” property. So long as you buy a “like kind” property within the allotted time window allowed for by the IRS you will ideally not owe capital gain taxes.

The IST™ process has its foundational legal basis under the “installment sale” rules provided for by the Internal Revenue Service under US Code §453. Under Code §453, an installment sale can be used to defer capital gains taxes by breaking up payments on the sale over time in multiple installments.

In a typical §453 installment sale, the buyer has a contract to buy real estate from the seller whereby the buyer agrees to pay the seller the total sales price over time in installments thus enabling the seller to pay the capital gain tax penalty over the life of the installment sale contract.

The pro with a typical installment sale is that the seller can defer the capital gains tax bite over a period of years and does not have to pay the tax all at once. However, the con with the typical installment sale is buyer instability and lack of financial liquidity for the seller. What happens if the buyer stops making installment payments due to bankruptcy or other personal financial hardships? Yes. The seller can attempt to enforce the installment note in court, but if the buyer is insolvent the seller has no practical way to be made whole other than to retake the property.

Alternatively, an IST™ process allows the real estate to be sold and the sale proceeds held in a third-party trust which pays the seller the final purchase price over time in installments. The sale proceeds remain in the trust and can be invested with the possibility of earning long-term interest over the life of the installment note thus increasing the possibility of diminishing your overall capital gains tax exposure.

An Installment Sales Trust (IST) ™ can be designed with flexibility in terms of the amount and time the trust pays installments to the seller as well as how the sale proceeds can be invested. Throughout the lifetime of the IST™, the Trustee and the seller work together along with accounting, legal and financial planning advisors to ensure the structure stays sound for years to come. The note may also pass on to your beneficiaries after you are gone and could be free from future estate taxes.

Contact the law firm of J.S. Burton, P.L.C. today to have the firm run an IST™ analysis to determine whether an Installment Sales Trust structure is right for you.

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477 Viking Drive, Suite 410, Virginia Beach, VA 23452
| Phone: 757.301.9500
5425 Discovery Park Blvd., Suite 101, Williamsburg, VA 23188
| Phone: 757.301.9500
1750 Tysons Blvd., Suite 1500, McLean, VA 22102
| Phone: 757.301.9500

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477 Viking Drive, Suite 410 , Virginia Beach, VA 23452 | Phone: 757.301.9500
5425 Discovery Park Blvd., Suite 101, Williamsburg, VA 23188 | Phone: 757.301.9500
750 Tysons Blvd., Suite 1500, McLean, VA 22102 (By Appointment Only) | Phone: 757.301.9500