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larrywww

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So, the problem is if you don't get a substantial down payment, the seller may default, which would defeat the aim of securing an exit from the current high priced market.  This will have the impact of postponing taxes (except the payments received during any tax year).

But even if you find a willing buyer, there is the following obstacle:

1. You can't entirely preclude the possibility that the buyer will sell or refinance----although you can try to make the financing as attractive as possible.  If the buyer does either, then the seller might be forced to immediately pay all the taxes---it's effectively out of his control.   Even if doing so is a breach of contract, it doesn't mean the buyer can NOT do it.

2. If the buyer is sophisticated and wants to keep the seller finance, they could (with the seller's consent), walk the mortgage to another property that they own---but that isn't always going to be possible.

My proposed solution: Combine a seller carry at 60% LTV with the buyer's purchase of an annunity or structured settlement or other periodic payments in exchange for the cash down payment made.  Won't that postpone the payment of taxes (to the extent received)?  Or maybe do an annuity on both the seller carry (60% LTV) and the down payment, so the seller doesn't have to worry about what the buyer does.   It's not a 1031, so I don't think you would need an exchange accomodator, but you would need escrow to set up annuity or other arrangement.

It seems like an annuity may have tax advantaged treatment (although I am not a CPA), since this article mentioned that:

4. Deferred annuities provide tax-advantaged saving and lifetime income. With a deferred annuity, you begin receiving payments years or decades in the future. In the meantime, your premiums grow tax-deferred inside the annuity. They're often used to supplement individual retirement accounts and employer-sponsored retirement plan contributions because most annuities have no IRS contribution limits.

"The only limiting factor would be the amount of premium an insurance company is willing to accept for the same individual," says Ken Nuss, founder and chief executive officer of AnnuityAdvantage, an online annuity marketplace. This amount ranges from $500,000 to $3 million but is typically capped at $1 million to $2 million, he says.

"But if someone wanted to put more than that in, he could split it up among multiple insurance companies," Nuss says.

An exception to annuity contribution limits are qualified longevity contracts (QLACs). These are deferred income annuities designed to help retirees turn retirement assets into a stream of lifetime income.

Under IRS rules, you can only convert up to $130,000 or 25 percent of your funding retirement account (whichever is less) to a QLAC in 2018.

Money in a QLAC is exempt from required minimum distributions (RMD) until age 85. This makes them useful for individuals approaching RMD age (70½) who don't need all their distribution now and would like a lifetime income stream.

 

A deferred income annuity (DIA) can also provide a future stream of income but doesn't have any IRS restrictions. These annuities can be held in retirement and non-retirement accounts and work like an immediate annuity except payments begin 13 months to 40 years in the future.

"They pay their holders income for life, however, only after that individual has reached a certain age," Nuss says.

Not everyone is a good candidate for DIAs, he says. Those who may find them advantageous include individuals with the following:

  • a family history of longevity and who want guaranteed income for their life or for a spouse's life
  • the ability to cover immediate income needs as well as emergencies, and
  • the need to supplement retirement income in later years, such as to cover long-term care
 https://money.usnews.com/investing/investing-101/articles/things-you-need-to-know-now-about-annuities

Another possibility is to use a form of life insurance, which in some ways is similar to an annuity (Again, I'm not an agent).

I think there is an argument that if the down payment is used to create a payment plan, then the seller only needs to pay taxes only to the extent that payments are received.  

Actually I have been perusing Publication 537 from the IRS on installment sales and their seems to be alot of complications in this entire area, I am not really sure.

This publication rules out the following scenarios:
1. If an irrevocable escrow account is established to pay the installments, then this is no longer an installment sale----all of the payments are immediately recognized in the year of the sale.
2. A bond or other security that can be traded in and cashed will be considered as an immediate and unconditional payment in the year of the sale.
3. You can't try an installment sale to a related person (lineal descendant or ascendant, or sibling---there is a long section on "related person" but these are some of the highlights)---it will be immediately recognized in the year of the sale.

So, these are 3 complete nonstarters in terms of structuring an installment sale.

A provider of structured settlements (which are like annuities, basically) has published a pamphlet in which it supports the argument that an installment sale could be structured where the buyer pays directly to an insurance company or other entity to structure an installment sale where the buyer's obligations can be totally replaced by this income stream.  Here is the brochure.   
https://www.lesti.com/files/structuredsales_breathinlifeintoinstallmentsales.pdf

I'm not vouching for the content (or the company---there are others that provide the same service even if they are one of the oldest), but they do make an argument that this kind of structure arguably might survive IRS scrutiny.  The attorney who drafted this memorandum is also (I think, not sure) is employed by---may even be part owner of---the structured settlement company---so you should keep that in mind---as well as the fact that this memorandum is 13 years old---and I don't know that it has been updated.

There is a problem with this structured sale market, however----according to this video the only insurance companies who will participate (alot have abandoned the market, apparently) only invests in treasury bills---which have a super low return.  So, the buyer can't  get a much better return than that.  That would probably be a non starter for most investors. 


Why did some of the large insurers (Hartford, John Hancock, etc) get out of the markets after Dodd Frank.  From what I have heard the problems were:
1. The financial crisis had left some major insurers weak and they were trimming their balance sheets and this wasn't a major earner for them;
2. The treasury markets were so low that there wasn't a safe way to guarantee a decent return.
3. Some also say that the fiduciary rule was a headwind for this market.

In any case, as of today a 10 year treasury has something like a return of 2.84%.  If you wanted to use a structured sale then your return might be 10 to 20% lower than this (in the low 2% range).  If you wanted to pursue this option, then you would have to have at least a half million dollar deal (they don't consider it worthwhile to do less than this).   Although you can avoid taxes, the returns aren't exactly exciting.  But it might be better than getting a higher return if there is the risk that the buyer might suddenly decide to sell or refinance without telling you.  (Sure, you could sue them---but by this point your tax liability might already be baked into the situation). 

Another aspect of this transaction that raises a few eyebrows is usually domiciled offshore---Barbados or another offshore destination----although the deals I have seen has the insurance company or trust company equally liable.  (The justification for going offshore is that a US entity that carried this risk on its books would have to pay more in the way of taxes---and allegedly going offshore is the only way to make this business model work.  I have no insight into whether or not this is plausible.)  When the major insurers pulled out of this market---they pulled out the assignment companies that were doing most of this business---so that they left the market without alot of major players.  Although some have expressed optimism that as treasury and other yields increase some major insurers may decide to rejoin the market---but, for now, this is all there is.

What if you simply ordered an annuity or bought life insurance during escrow---would this qualify?  (Unlike the assignment companies, the escrow isn't an irrevocable trust that is in no way controlled by the seller---and has the requisite independence from the buyer).  I'm not a CPA---and am unsure about this---although if buyers could opt for getting these kind of higher returns----then why wouldn't everyone do this?  It's a problem.

I should mention that there is another strategy called a "monetized installment sale'' in which you not only do some kind of structured settlement but you get back almost all the money at once as a kind of "loan"----The IRS have never approved of this kind of thing and it seems kind of shaky to me.  Although, again, I'm not  a CPA.

Another entity that the IRS specifically disproved and outlawed was something called a "private annuity trust".  I am not arguing for that.  (Though some say that the private annuity trust may be too similar to these other arranagements and are hoping for more clarification from the IRS in the future.)

There is also a group that speaks of a "deferred sales trust".  I think that Bill Exeter has specifically said that this type of arrrangement really IS indistinguishable from a private annuity trust---he does NOT recommend doing this.

In sum, there are alot of unanswered questions connected with this strategy---and the rewards in some instances seem rather dubious---so I am not sure about pursuing this as a strategy  or not.

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