Reduce Tax and Increase Liquidity on Sales of Ag Assets

A Monetized Installment Sale can provide up to 93.55% of the selling price in cash at closing while deferring the taxes for 30 years on the sale of agriculture assets. This could be an ideal way to structure a sale for sellers, who have a low-cost basis and a high potential tax liability. It also works for farm assets with significant debt due at closing. Keep reading to learn more:

How It Works

The seller identifies a final buyer. Then, an intermediary (a company in the business of facilitating these transactions) purchases the farm property from the seller by issuing a 30-year interest-only installment contract to the seller. The intermediary simultaneously resells the asset to the final buyer on the same terms negotiated by the seller. Selling through the intermediary enables the seller to defer the tax for 30 years. Contemporaneously with the sale, the seller also gets a loan from a private lender that specializes in making loans for this transaction. The loan provides tax-free cash to the seller for up to 93.55% of the net sales price. Any existing loan would be paid off by the new loan, and the loan terms are interest-only with the principal due in 30 years. The payments received by the seller from the installment contract are sufficient to service all the interest and principal payments on the loan. In year 30, the seller will be taxed on the gain. Funding of the tax due in year 30 can be fulfilled using life insurance.

Why This Method is Not Widespread

This sales structure has been around for a long time. Many publicly traded companies use this method to sell timber land. However, these transactions have historically required sophisticated legal structures and recourse loans. What has changed in recent years is that private lenders have begun to offer loans under $100 million. Moreover, the lenders are willing to assume the risk that the dealer may be unable to make the installment payments to the seller. This is essential, since most sellers would not be willing to enter into this kind of transaction if they were at risk of the dealer failing to make the installment contract payments and the lender enforcing personal guarantees or seizing other collateral. Now that there are lenders, who will make loans without putting the borrower’s other assets at risk, we expect this approach to become more widespread.

This structure can be particularly attractive to sellers, who have large existing loans on the farm property being sold, since the loans can be paid off at closing with funds from the new lender without the added burden of paying capital gain taxes out of sales proceeds. Thus, it can preserve some of the liquidity by deferring the tax. This structure may also be an attractive alternative to a 1031 like-kind exchange for sellers that want to exit from farm land or other farm assets, eliminate recourse debt and have immediate liquidity to invest in other income producing investments. Because the structure is a gain deferral, the greater the capital gain, the greater the benefits. In our typical completed cases, the seller receives around 10 to 15% more of the sales price at closing.

Learn More

While there is very specific guidance on the use of Monetized Installment Sales on investments not meeting the definition of farm assets or farm property, most examples of this deferral strategy are in fact with farm property or farm assets such as timber land, as referenced above. To find out if this method could work for you, please contact your Sikich tax advisor or the experts at Wealth Design Consultants, LLC.

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David Holaday, ChFC, CAP, has over 25 years of experience as a financial consultant. He is the founder and managing member of Wealth Design Consultants, LLC.

Jeff Saunders, JD, CPA, is an attorney at Adinamis & Saunders with extensive experience in taxation, estate planning, charitable planning, business law and mediation.