Sellers can benefit from monetized installment sales whenever they are faced with capital gains tax in amounts significantly greater than 6.5% of their net sales proceeds. The cost of the transaction to a seller includes 1.5% in loan-related costs and a 5% reduction in the final balloon payment received from the dealer upon satisfaction of the installment sale promissory note at the end of 30 years.
Against this total cost of 6.5% of the net sales proceeds, a seller gains the advantage of being able to freely invest – for 30 years – an amount equivalent to the capital gains tax that otherwise would have been due up front. The time value of money works for the seller, enabling them to capture a financial benefit equivalent to the net present value of the investment income received during that period.
The seller, as a borrower on the monetization loan, is required to make payments to the monetization lender only to the extent they have received payments from the dealer. The lender does not receive a lien on the installment contract, on the asset that was sold, on the installment payments made by the dealer, or on the investments made by the seller/borrower. The lender does not require that the seller/borrower provide any security, because the lender relies only upon the dealer’s investment income and payments to the seller as the source of funds for the seller/borrower to repay the loan. The lender does not require that the dealer
Monetized installment sales have been utilized by public companies for at least twenty years, with the approval of their boards, auditors and the SEC. A US Bankruptcy Court in California ordered use of a monetized installment sale in 2014 to help settle a case in which sale of real estate could produce cash.
Guidance from the IRS regarding monetized installment sales may be found in an IRS General Counsel Memorandum published in 2012, which reviewed and approved a monetized installment sale in a form that serves as the model for present-day monetized installment sales.
A monetized installment sale offers advantages to sellers who are considering other tax deferral strategies:
• Compared to an installment sale by itself, the monetized installment sale reduces risks related to default, prepayment and interest rate fluctuations, and provides nearly full liquidity;
• Compared to a deferred sales trust, a monetized installment sale features lower overall costs, less ongoing structure and compliance burden, and vastly greater freedom to use the sales proceeds as desired, without third-party oversight;
• Unlike a 1031 exchange, real estate sellers can dispose of one real estate investment and buy a replacement property without any risk of losing tax deferral on their relinquished property resulting from potential failure to meet exchange deadlines.