Structure Sale Offers Greater Advantage Under New Tax Code
Under the American Taxpayer Relief Act of 2012, the top capital gain tax rate has been permanently increased to 20% (up from 15%) for single filers with incomes above $400,000 and married couples filing jointly with incomes exceeding $450,000. In addition, the new IRC Section 1411 (3.8% Medicare surtax on net investment income, which includes capital gains), results in an overall rate for higher-income taxpayers of 23.8% — a staggering 58% increase from 2012 tax rates!
2020 Federal Capital Gains Rates *
|Single Taxpayer||Married Filing Jointly||Capital Gain Tax Rate||Section 1411 Medicare Surtax||Combined Tax Rate|
|$0 – $40,000||$0 – $80,000||0%||0%||0%|
|$40,001 – $200,000||$80,001 – $250,000||15%||0%||15%|
|$200,001 – $441,450||$250,001 – $496,500||15%||3.8%||18.8%|
*Adjusted for inflation *The 3.8% Medicare surtax only applies to “net investment income” as defined in IRC §1411.
The bad news is that taxes have increased. The good news is that with the Structured Sale, we not only still defer the applicable taxes on the sale of an asset, but we can avoid the higher rates altogether by spreading the payments out over time and keeping them under the thresholds at which the higher rates kick in!
Let’s look at a comparison of a cash sale vs. a Structured Sale:
A couple married filing jointly, sells their business for $750,000. It was purchased 20 years ago for $100,000 (capital gains of $650,000). Terms of the Structured Sale are monthly payments of $6,846.92 per month ($82,163.04 annually), beginning January 1, 2021 for 10 years. (Assuming only capital gain income and no other income)
Tax on Capital Gains of $650,000
|Capital Gains Tax||(($ 93,175.00)|
|Medicare Surtax 3.8%||(($ 15,200.00)|
|Net to Invest
($750,000 – taxes)
To equal the after-tax income of $81,446.74 from the Structured Sale, the seller would have to invest $641,330.00 and earn a guaranteed 10.31% net return. (taxable income of $105,575)
Tax on $82,163.04 (annual payment)
|Capital Gains Tax||($ 0.00)|
|Medicare Surtax 3.8%||($ 0.00)|
|Medicare Surtax 3.8%||($ 716.30)|
|Total Annual taxes||($ 716.30)|
|Total Taxes over 10 yrs.||($ 7,163.00)|
|PV of annual taxes over 10 yrs. at a discount rate of 3%||($ 6,110.18)|
|After Tax Income||$81,446.74|
|Total Guaranteed Income (pre-tax)||$821,630.04|
In a cash sale, almost 90% of the capital gain is taxed at the higher rates of 15 and 20%, as well two thirds subject to the Medicare Surtax of 3.8%. By selling the property using the installment sale method and structuring the payments, 100% of the payments are subject to the lower 0% capital gains rate and no Medicare Surtax.
The Owners are free to sell their business and retire with peace of mind knowing that all his future payments are guaranteed. They don’t have to worry about how to invest their proceeds in a volatile market, and they have significantly reduced their tax burden.
For advisors looking to save their high-value clients a significant tax burden, the structured sale is a proven option that makes more sense than ever.
Work With Us
We help CPA’s, business owners, land owners & real estate investors develop tax control strategies to keep more of what they or their clients have earned. A phone call costs you nothing, but not making the call could cost you a lot! Get started today!