Tuesday, March 03, 2009

How Bill Saved $240,981 Using a Self Directed Installment Sale

Bill owned an investment property that had appreciated a lot in value. He had depreciated it completely over the years.

Bill’s adjusted cost basis was $0. His straight line depreciation was 200K. The selling price after closing costs was 1.2 million. His gain is 1.2 million and of that 200K is taxed at depreciation recapture rates, and 1 million is taxed as capital gain.

Bill is 62 years old and lives in Utah where capital gains are taxed at 5%.

Bill did not want to do a 1031 exchange and wanted the maximum amount of proceeds to be kept in his family. A Self Directed Installment Sale was his vehicle of choice.

If Bill had sold and paid all taxes upfront, he would have owed about 264K in taxes.

By structuring the sale correctly, Bill chose a 25 year payout so it would most likely last him the rest of his life. He is single and has one son who is financially sound.

By spreading out the repayment of capital gains and depreciation recapture over 25 years, Bill was able to recognize a savings of approximately 241K .

Assuming Bill paid his taxes, invested the proceeds at 6% interest and took withdrawals to live on over a 25 year period, his annual income would be approximately $73,056.00 per year.

By deferring and spreading out the tax repayment over 25 years and assuming that the proceeds are also invested at 6% during the payout phase, his annual income is $93,661.00 per year.

In these crazy times, can you use the extra income, or do you prefer to give it to the IRS?
Paula Straub

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