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Many high-value asset owners know about tax strategies that allow them to manage the tax implications of asset sales. One common legal strategy derived from IRC 453 is the provision of the Internal Revenue Code related to installment sales. Leveraging the benefits of IRC 453 requires careful legal planning. The attorneys at 453 Deferred Sales Trust Powered by Pennington Law have extensive experience advising clients on managing the tax implications of asset sales. Our nationwide practice assists clients across the U.S., and we are proud to have earned recognition as the Best Deferred Sales Trust Law Firm in the U.S. for 2024.
Turn to our team of knowledgeable legal professionals who have in-depth insights into matters such as:
● Tax law
● Asset protection
● Financial advisory services
● Wealth and fiduciary matters
● Irrevocable trusts
● Professional third-party trustee duties
● Financial reinvestments
● Insurance
Before you sell an asset, understanding your legal options under IRC 453 can help you maximize the value of your property when you sell it. Contact the experienced and knowledgeable team at 453 Deferred Sales Trust Powered by Pennington Law for a free, no-obligation case evaluation. Let’s discuss your options for managing the potential tax liabilities from selling an appreciated asset, including a deferred sales trust — “The Tax Tool You Didn’t Know You Had.”
What IRC 453 Is All About
Individuals and families who sell high-value assets may have heard about IRC 453. But what is IRC 453? Internal Revenue Code §453 governs the taxation of income from an installment sale of an asset. Under IRC 453, an asset owner may structure the sale of that asset to take advantage of various tax benefits afforded to installment sales.
Although an asset sale normally requires a seller to pay capital gains taxes on the increased value of the assets during the seller’s ownership, proper structuring of the sale may allow the seller to defer paying capital gains taxes. Thus, IRC 453 can enable asset sellers to manage the tax implications of a sale.
How IRC 453 Works
When you sell an asset and want to manage the tax implications of the sale, you might ask a legal professional, “How does IRC 453 work?”
An asset seller may leverage IRC 453 through a legal structure such as a deferred sales trust. With a deferred sales trust, a seller transfers the asset they wish to sell to the trust. In exchange, the seller receives an installment payment contract from the trust, which governs how the trust will pay the asset sale proceeds to the seller. The trust then sells the asset to a bona fide third-party purchaser and holds the sale proceeds in trust.
The trust may invest the proceeds and pay the principal and income from those investments as required by the installment payment contract. IRC 453 states that the seller only pays capital gains taxes on the asset sale when it distributes the principal from the sale proceeds to the seller.
What Are the Tax Benefits of IRC 453?
The tax benefits of IRC 453 allow an asset seller to defer capital gains taxes following the sale of an asset that increased in value during the seller’s ownership.
In a legal arrangement recognized by IRC 453, such as a deferred sales trust, an asset seller only pays income taxes when they receive payment of principal from the sale proceeds. Thus, a seller can spread out the tax hit from an asset sale over multiple years, rather than having to pay the full capital gains tax
bill upfront in the year of the sale.
Alternatively, a seller can defer capital gains taxes indefinitely if they do not receive any principal from the sale proceeds. Instead, a seller may have the sale proceeds reinvested through a deferred sales trust, which pays the seller only the income generated from investments made with the proceeds. However, IRC 453 does not allow sellers to avoid capital gains taxes permanently. When a seller or their successor-in-interest receives any portion of the principal from the sale proceeds, they become liable for capital gains taxes on that portion of the principal.
How Can I Be Eligible for IRC 453?
A party can take advantage of the benefits of IRC 453 through a legal structure such as a deferred sales trust. The requirements for eligibility for IRC 453 through a deferred sales trust include:
● A seller must create a bona fide third-party trust with a trustee independent of the seller. The seller may not have any ability to control or influence the trustee’s decision-making.
● The seller must form the trust before entering an agreement to sell the asset to the ultimate purchaser and transfer the asset to the trust, which conducts the sale.
● The trust must receive the sale proceeds. The seller may not have any legal or equitable interest in the sale proceeds beyond their right to receive payment from the sale proceeds per the installment payment contract between the seller and the trust.
● The trust must receive fair compensation for the asset from a bona fide third-party purchaser.
Are There Any Downsides of IRC 453?
Some of the potential drawbacks and considerations that asset sellers should keep in mind when deciding whether to structure a sale to take advantage of the tax benefits of IRC 453 include:
● Transferring Ownership of the Asset to a Third-Party Trust – When using IRC 453 to structure an asset sale through a third-party trust, an asset owner must transfer their asset to the trust before a sale to the ultimate purchaser, which means giving up control of the asset before the sale.
● No Immediate Liquidity – The benefits of IRC 453 preclude receiving full payment of the sale proceeds after the asset sale. Thus, structuring a sale to comply with IRC 453 may not work for a seller who needs liquidity from the sale.
● Tax Liabilities Upon Distribution of Principal from Sale Proceeds – Under IRC 453, an asset seller may incur capital gains taxes if they receive payment of any portion of the principal from the proceeds of the asset’s sale. As a result, a seller may inadvertently incur tax liabilities if they receive principal from the sale, such as when a deferred sales trust inadvertently distributes principal to the seller. Failing to recognize a distribution of principal may jeopardize the protections of a deferred sales trust and expose a seller to taxes, fines, penalties, and interest.
● Need to Plan for Eventual Payment of Capital Gains Taxes – Although a deferred sales trust that takes advantage of the tax benefits of IRC 453 can defer capital gains taxes for a long time, it cannot permanently eliminate those taxes. An asset seller should consider how they or their descendants or successors will pay the capital gains taxes on the sale when a deferred sales trust ultimately distributes principal from the sale proceeds.
How 453 Deferred Sales Trust Powered by Pennington Law Can Help You
When you decide to use IRC 453 to manage the capital gains tax burden from an asset sale, let the legal team at 453 Deferred Sales Trust Powered by Pennington Law help you achieve your financial goals. Here’s what we can do for you.
Review Your Financial Circumstances and the Details of Your Asset Sale
Our attorneys will thoroughly review the terms of your proposed asset sale and your financial circumstances to evaluate your legal options for achieving your goals for the sale, such as managing the tax implications of the sale.
Discuss Your Needs and Goals
We will meet with you to discuss your goals and needs following the sale and determine whether a deferred sales trust can best help you achieve your financial objectives.
Establish a DST Correctly
Our experienced legal team can guide you through the complexities of IRC 453 to help you avoid mistakes that may cause you to lose the benefits of a deferred sales trust, which may require you to pay the full capital gains tax from your asset sale up front, plus unintended penalties, fees, and interest.
Structure Your Deferred Sales Trust to Meet Your Unique Goals
Let our lawyers help you create a deferred sales trust tailored to your specific financial circumstances and objectives. When you want to spread the capital gains taxes from an asset sale, we can structure a DST to pay the sale proceeds over time. Alternatively, if you want your asset sale to form the basis of family wealth, we set up your DST to pay only income generated by reinvesting the sale proceeds, allowing you to defer capital gains taxes indefinitely.
Contact Us Today to Learn More About IRC 453
When you decide to sell an asset that has gained value during your ownership, utilizing the provisions of IRC 453 through a deferred sales trust to manage capital gains taxes from the sale can help you achieve your financial objectives. Contact the team at 453 Deferred Sales Trust Powered by Pennington Law today for a free initial consultation with our legal team to learn more about IRC 453.
