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California Tax Board Disallows Deferred Sales Trusts & Monetized Installment Sales

During the past few years there have been a growing number of advocates who have been touting new forms of installment sales including Deferred Sales Trusts and Monetized Installment Sales as alternatives to 1031 Exchanges and Delaware Statutory Trusts to defer taxes on the sale of real estate properties including rentals and even personal residences.

In late September of this year, the California Franchise Tax Board (FTB) issued a notice to 1031 Exchange Qualified Intermediates (QIs) that the state will begin imposing penalties against QIs who actively assist clients with deferring taxes through Deferred Sales Trusts or Monetized Installment Sales. Some QIs promote the use of Deferred Sales Trusts or Monetized Investment Sales as back-up strategies in cases where a seller is unable to complete a 1031 Exchange.

Background

An installment sale is a type of sale where a buyer takes possession of the property and agrees to pay the seller over time, often making interest only payments for some period followed by a balloon payment to the seller which includes any remaining owed principal. IRS tax code M453 states that no capital gains taxes are owed by the seller in an installment sale until such time that they begin collecting principal funds from their sold property. While sellers would be obligated to pay income tax on any interest income that they receive in an installment sale, they could defer the payment of capital gains taxes into the future until they receive the principal funds from their sale.

In a Deferred Sales Trust or Monetized Installment Sale, an intermediary is involved who accepts purchase proceeds from a buyer and then provides funds to seller in either the form of loan or though a stream of payments from investments that are made by the intermediary. These quasi installment sales are structured to yield a more immediate use of sale proceeds to the seller than what the FTB believes is intended by tax laws.

One of the nation’s largest Qualified Intermediary firms, IPX1031 quoted FTB officials as stating that “they view these transactions as “clearly improper” and “blatantly unsupported by the law.”

The Delaware Statutory Trust and Internal Revenue Code 1031 remain fully approved by both state and federal tax regulators as a means of deferring taxes on the sale income and business properties. To read the notice, go here.

Several questions have been raised over this notice and we expect more information to become available which we will share in future blog posts.

For more information on Delaware Statutory Trust options and approved 1031 Exchange tax deferral strategies, please contact First Guardian Group at 866-398-1031 or info@FirstGuardianGroup.com.

 Download and read our latest ebook "Tax Deferral Strategies " below!

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Paul Getty

Paul Getty is a licensed real estate broker in the state of California and Texas and has been directly involved in commercial transactions totaling over $2 billion on assets throughout the United States. His experience spans all major asset classes including retail, office, multifamily, and student and senior housing. Paul Getty’s transaction experience includes buy and sell side representation, sourcing, and structuring of debt and equity, work-outs, and asset and property management. He has worked closely with nationally prominent real estate brokerage and investment organizations including Marcus Millichap, CB Richard Ellis, JP Morgan, and Morgan Stanley among others on the firm’s numerous transactions. Paul Getty also maintains a broad network of active buyers and sellers of commercial real estate including lenders, institutions, family office managers, and high net worth individuals.

Prior to founding First Guardian Group/FGG1031, Paul Getty was a founder and CEO of Venture Navigation, a boutique investment banking firm specializing in structuring equity investments made by institutions and high net worth individuals. He possesses over 25 years of comprehensive worldwide business management experience in environments ranging from early phase start-ups to multi-billion-dollar corporations. His track record includes participation in IPOs and successful M&A activity that has resulted in investor returns of over $700M.

Paul Getty holds an MBA in Finance from the University of Michigan, graduating with honors, and a Bachelor’s Degree in Chemistry from Wayne State University. He is a member of the Institute of Real Estate Management (IREM), a Certified Property Manager Candidate (CPM), and a member of the US Green Building Council. Paul Getty holds Series 22, 62, and 63 securities licenses and is a registered representative with LightPath Capital Inc, member FINRA /SIPC.

Paul Getty is a noted speaker, author, and actively lectures on investments and sales and management related topics. He is the author of The 12 Magic Slides, Regulation A+: How the JOBS Act Creates Opportunities for Entrepreneurs and Investors, and Tax Deferral Strategies Utilizing the Delaware Statutory Trust (DST), available on Amazon and other retail outlets.

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