A Graphic Guide to the Monetized Installment Sale

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Monetized Installment Sale

If you invest in commercial real estate, you’ve undoubtedly run into frustrating tax circumstances. Real estate investors commonly embrace tax-deferral strategies like the 1031 exchange and deferred sales trust (DST). However, the monetized installment sale also provides unique tax-deferral benefits.

Consider a conversation with your tax attorney.

What is a monetized installment sale?

A monetized installment sale is a unique tax deferral strategy that allows the seller of “property” to defer capital gains taxes for 30+ years.

Basically, the strategy combines an installment sale with a monetization loan.

Let’s dive into the details.

What is does the IRS consider property?

Not every type of property is eligible for a monetized installment sale.

Fortunately, installment sale regulation outlines certain types of assets that cannot be sold via installment. These include inventory, dealer sales, stock or securities, and other installment notes. You can find the details here.

In summary, real estate, bitcoin, and your uncle’s prized Ferrari are all eligible for a monetized installment sale.

Stocks, securities, or anything traded on an established securities market are not eligible to be sold using this strategy.

Who are the players in the transaction?

There are four players that are required to execute a monetized installment sale.

  1. Seller
  2. Buyer
  3. Dealer
  4. Lender

The seller is the property owner who is disposing of the property.

Unsurprisingly, the buyer describes the person who is acquiring the property.

The dealer is the facilitator of the monetized installment sale. See more information on dealers below.

The lender is the entity that provides the monetization loan for the property. This lender must be a third party, unaffiliated with the other three members of the transaction.

Who is the dealer in a monetized installment sale?

In a monetized installment sale, the dealer refers to the facilitator of the transaction.

Like a broker in a real estate transaction, the “dealer” coordinates with the key parties of the transaction. They ensure a clean, compliant, and stress-free transaction.

I’ve spoken with a few dealers and prefer to work with Chris Sargent at Liquid Capital Partners. Mention Bullpen when you speak to Chris and save $5,000 on your monetized installment sale.

How does a monetized installment sale work?

1. A Seller sells a property to the Dealer

After a Seller finds a Buyer for the sale of property, a Dealer is inserted between the two parties to facilitate the monetized installment sale.

Like a traditional installment sale, the Seller sells property to a third-party Dealer in return for a 30-year, interest only installment contract.

Step 1: Monetized installment sale dealer inserts in the transaction

2. Dealer sells property to Buyer

At no mark-up, the Dealer sells the property to the Buyer in an all-cash, fee-simple interest sale. 

Step 2: Monetized installment sale dealer sells property to Buyer

3. Lender issues Seller a 30-year, non-recourse, interest only investment business loan

An unaffiliated lender provides the seller with an unsecured loan in the amount of the sale price.

The loan has special characteristics that protect the seller from the lender.

  1. Single Source Provision: The Lender cannot compel the Seller to pay more on the loan than the monies in the Seller’s escrow from the Dealer.
  2. Loan Guarantee: The Seller will not have to repay the loans from monies other than those from the Dealer in the Seller’s escrow.
  3. The Lender cannot report any non-payment to a credit reporting agency
Step 3: MIS Lender gets involved

 4. A series of escrows ensure repayment of the monetization loan

Monetized Installment Sales are low maintenance. As such, a series of escrows automate the loan payment process.

Step 4: MIS escrows put in place

As a result, the Dealer’s note and the Lender’s note offset. The Seller receives monies equivalent to the sale proceeds of the property. No capital gains taxes are due until the monetization loan reaches term. The lender can’t pursue the Seller for non-payment!

Are monetized installment sales legal?

The IRS issued a Memorandum from the Office of the Chief Counsel on Monetized Installment Sales in 2012, blessing the structure.

However, each step in the transaction must have economic significance. You can’t just pocket the loan proceeds from the monetization loan. You must invest the proceeds back into your business.

Unfortunately, current regulation isn’t explicitly clear about monetized installment sales. You can protect yourself by requesting a private letter ruling from the IRS. In a private letter ruling, the IRS will provide an opinion on the tax treatment of your transaction.

What other companies have done a monetized installment sale?

Many investors and businesses have taken advantage of the tax deferral power of the structure.

The following companies have executed monetized installment sales that range from $24 million to $4.8 billion in size.

ABOUT THE AUTHOR
Tyler is the Founder & CEO of Bullpen. Before becoming obsessed with proptech, Tyler built a commercial real estate consulting practice that advised some of the largest institutional investment firms on their most important projects. Tyler uses the Bullpen blog to share ideas and resources with readers who will shape the future of commercial real estate.

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