Latest / The High Net Worth Podcast with Fexingo: Wealth Management, Tax Strategy, and Affluent Finance / How Wealthy Families Use Monetized Installment Sales
Transcript
- Lucas: You're sitting on a piece of real estate you bought for $5 million back in 2010. Today it's worth $20 million. You want to sell, but you do not want to write a $4 million check to the IRS next April — not exactly a pleasant thought. Luna: Right, and that's the classic wealthy-family problem. You have a concentrated, appreciated asset, and you'd love to diversify, but the tax bill is the deterrent. Lucas: Exactly. So enter the monetized installment sale. It's a strategy that lets you sell an asset, defer the capital gains tax, and get a lump sum of cash today — not over time like a traditional installment sale. And it's completely legal, grounded in IRS Revenue Procedure 2020-24. Luna: Before we go deep — I want to mention something. If our money conversations have helped you think about a decision differently, a handful of listeners chip in monthly through Buy Me a Coffee dot com slash Fexingo. That's literally what funds making this many of these. And it keeps them ad-free. Lucas: Yeah, and we really appreciate that. So — back to the mechanics. In a traditional installment sale, you sell the asset and receive payments over time, paying tax only on the gain as you receive each payment. But many sellers want all the cash upfront for reinvestment. Luna: And that's where the monetized installment sale comes in. You sell the asset to an unrelated third party — a 'facilitator' — on an installment basis, but then the facilitator sells it to the ultimate buyer for cash. The facilitator gives you a lump sum loan equal to most of the sale proceeds, secured by the installment note. Lucas: Right. The key is that the facilitator is a true buyer — not a straw man. The IRS has issued guidance under Revenue Procedure 2020-24 that provides a safe harbor for these transactions, provided certain conditions are met. The facilitator must be a 'regularly engaged' in the trade or business of buying installment obligations, and there must be no prearranged agreement for the facilitator to sell the note to the ultimate buyer. Luna: Let's make this concrete. I spoke with a family office in Dallas that used this on a $20 million commercial real estate portfolio sale in Q2 of this year — 2026. The seller was a 68-year-old founder who wanted to retire and diversify into a balanced portfolio of stocks and bonds. Lucas: Perfect example. So they sell to a facilitator — call them 'ABC Capital' — for $20 million, with a 10-year installment note paying interest only at a rate pegged to SOFR plus a spread. ABC then sells the property to the ultimate buyer for cash. The seller gets a loan from ABC — say $18 million — representing most of the present value of the note. The loan is non-recourse, secured only by the installment note. Luna: And the tax result? The seller reports the gain over 10 years as they receive payments on the note. But they've got $18 million in cash today to reinvest. They pay interest on the loan, but the investment returns on the $18 million hopefully outpace that cost. Lucas: That's the bet. And it's particularly attractive now, in July 2026, with interest rates having stabilized after the Fed's cuts last year. The spread between borrowing costs and expected portfolio returns is narrower than it was in 2023, but for a diversified portfolio, it's still positive on a risk-adjusted basis. Luna: There's also a timing consideration. Several provisions of the Tax Cuts and Jobs Act are set to expire at the end of 2026 — including lower marginal rates for individuals and the higher estate tax exemption. So high-net-worth families are looking to lock in gains this year and defer the tax into a potentially higher-rate environment. Lucas: Great point. And the monetized installment sale isn't just for real estate. It works for any appreciated asset that qualifies as capital gain property — business interests, collectibles, even cryptocurrency if structured properly, though that's trickier. Luna: Cryptocurrency? How would that work? The IRS has been pretty aggressive on crypto transactions. Lucas: It's rare, but I've seen it done. The key is that the asset must be sold to a facilitator who takes actual ownership and risk. With crypto, the volatility makes the pricing of the installment note challenging. Most facilitators won't touch it unless the asset is relatively stable — blue-chip coins with deep liquidity. Luna: So what are the risks? Because this sounds almost too good — defer tax, get cash now. There must be catches. Lucas: Several. First, counterparty risk. The facilitator is holding your installment note and has loaned you a large sum. If they go bankrupt, you could be left as an unsecured creditor. That's why you need a well-capitalized, reputable facilitator with a track record. Luna: Second, audit risk. The IRS has said these transactions can be legitimate under the safe harbor, but they're still a high area of scrutiny. If the structure deviates — say, the facilitator and the ultimate buyer are related, or the loan terms are too favorable — the IRS could recharacterize the whole thing as a current sale. Lucas: Right. And if that happens, you owe all the deferred tax plus penalties and interest. So legal and tax counsel is non-negotiable. Third, there's the cost. Facilitators charge fees — typically 1% to 2% of the asset value — and the interest on the loan adds up. You need to run the numbers to make sure the after-tax return on the reinvested cash exceeds the cost. Luna: And there's also a liquidity mismatch. The loan from the facilitator is typically non-recourse, but if the installment note defaults — say the ultimate buyer stops paying — the facilitator can seize the note and you could lose the collateral. That scenario is unlikely with a creditworthy buyer, but it's possible. Lucas: Exactly. So who is this for? I'd say a wealthy family with a single large, highly appreciated asset — a business, a real estate portfolio, a block of stock — who wants to diversify without taking a big tax hit in one year. It's not for small transactions; the legal and structuring costs make sense only above, say, $5 million in gain. Luna: And it's not for someone who needs the cash in five years. The typical note term is 10 to 15 years. If you need liquidity sooner, you might be better off with a traditional sale and paying the tax, or using a different strategy like a 1031 exchange for real estate. Lucas: Great contrast. A 1031 exchange defers tax but requires you to reinvest in like-kind property. A monetized installment sale gives you cash to reinvest in anything — stocks, bonds, private equity, whatever. That flexibility is a big advantage for families who want to reallocate their entire portfolio. Luna: I want to come back to the Dallas family office example. They ended up using the $18 million to build a portfolio of 60% global equities, 30% fixed income, and 10% alternatives — mostly private credit. The expected return is around 7% annually, while the interest cost on the loan is about 6.5%. So a small positive carry, but the real win is the tax deferral. Lucas: And that's the key metric. Even if the investment return barely covers the interest, the deferral itself is valuable. If you defer a 20% capital gains tax for 10 years, and you assume a 5% discount rate, the present value of that tax is about 12.3% — you've saved nearly 8% of the gain in present-value terms. Luna: That's a significant edge. And if rates go up in 2027 as some forecast, or if your personal tax bracket rises, the deferral becomes even more valuable. Lucas: Right. So we've covered the what, the how, and the risks. Let me summarize the checklist for anyone considering this. One: work with a qualified tax attorney who understands Revenue Procedure 2020-24 inside and out. Two: vet the facilitator thoroughly — audited financials, references, years in business. Luna: Three: model the economics with realistic return assumptions and stress-test the interest rate path. Four: have a contingency plan if the IRS challenges the structure — escrow funds for potential tax liability. Lucas: And five: consider the estate planning angle. If the installment note is held until death, the heirs receive a step-up in basis, wiping out the deferred gain entirely. That's a massive benefit for families thinking about multi-generational wealth transfer. Luna: That's a huge point. So the strategy can be combined with a grantor trust or an ILIT to maximize the step-up. It's not just about deferral during your lifetime — it's about permanent avoidance for your heirs. Lucas: Exactly. And that's the kind of holistic thinking that separates a good plan from a great one. So, to tie it all together: a monetized installment sale is a powerful tool for the right situation — large appreciated asset, desire to diversify, willingness to accept complexity and counterparty risk. It's not for everyone, but for families in that sweet spot, it can be transformative. Luna: I think a lot of listeners might be wondering: how do I even find a facilitator? There are about a dozen firms in the U.S. that specialize in this. Most are based in tax-friendly states like Texas or Florida. The large trust companies like Northern Trust and U.S. Trust also have divisions that facilitate these transactions. Lucas: Good addition. And one final thought: the political landscape. With the 2026 midterms approaching, there's chatter about potential changes to carried interest and capital gains rates. If rates go up, the value of deferring at today's rates increases. But if rates go down, well, you still have the deferral. It's a asymmetric bet in your favor. Luna: So the window for this strategy might be particularly favorable right now. Lock in the sale, defer the gain, and see what happens with tax policy. Lucas: Exactly. That's the play. And we'll be watching how the market for these structures evolves through the rest of 2026. For The High Net Worth Podcast, I'm Lucas. Luna: And I'm Luna. Thanks for listening.