What is a 453 Plan?

A 453 plan allows an individual to place the proceeds of a property sale into an investment account that pays out to them over a period of years. While the proceeds from the sale remain within the investment account, they are grown on a tax deferred basis. The seller is guaranteed a set schedule of payments, which will fluctuate dependent upon the performance of the investment account.

Anyone seeking a liquidity event could benefit from a 453 Plan, including:

  • Business owners seeking retirement
  • Developers who want to increase cash flow
  • People who wish to cash out from their business holdings
  • Someone selling their commercial property

Using the installment method of accounting under Section 453 of the Internal Revenue Code, you may defer the gains from your sale over a predetermined period of years. This approach could lower your initial taxes while granting you the ability to plan for the long term. You’ll receive a stream of periodic payments over the life of an Installment Obligation issued at the time of the sale. 

By choosing a 453 Plan, you are able to create a long-term strategy to receive your payments when you may have a more favorable capital gains rate.

How a 453 Plan Works

A 453 plan is structured as follows:

  • The seller and buyer enter into a sale.
  • They agree to do a 453 plan with a schedule of payments, using a third-party servicer.
  • The asset is not being sold directly from seller to buyer. Instead, it is being transferred to the third-party servicer who then sells the asset to the buyer. In other words, there is no constructive receipt and no capital gains tax on the sale.
  • The buyer makes 100% of the agreed upon sale amount available to the third-party servicer. The buyer remains personally liable to the seller for all payments in case of insolvency – an added level of protection for sellers.
  • The third-party servicer places funds with a financial advisor of the seller’s choosing, who invests and grows the funds over a period of years.
  • Payments are made to the seller over time according to the schedule of payments.

26 U.S. Code § 453

In the U.S. tax code, 26 U.S. Code § 453 explains how taxpayers can report income from certain types of sales or exchanges using a 453 Plan, also called an installment plan. With this arrangement, you’ll report the income from the sale only when you receive payments. In other words, you do not have to pay taxes on the full amount of the sale price all at once; instead, you will only pay taxes on the income as you receive it over time.

Establishing a 453 Plan

The team at Milestone facilitates the entire process for sellers and buyers, providing peace of mind that the plan is set up efficiently and correctly. Here is a general overview of the steps involved.

  • Determine if you are eligible. Eligibility depends on the type of asset you are selling and the terms of the sale. Milestone can help you determine if your sale is eligible.
  • Draft a sales purchase agreement. If you decide to use a 453 Plan, you will need to draft an agreement that outlines the terms of the plan. This agreement will include details such as the payment schedule, the interest rate, and any other relevant terms.
  • Choose your periodic payment obligation. You can decide how much money to receive immediately and how and when you want to receive payments over time.
  • Open the investment account. Milestone will open an account with a third-party custodian, work with your financial advisor, and service the account for the duration of the plan.
  • Choose investments. The financial advisor builds an investment portfolio based on the terms of the installment obligation. Your funds will grow in the account, tax deferred.
  • Receive payments. As the buyer makes payments under the plan, you will need to keep track of these payments and report them on your tax returns.
  • Report income and pay taxes. You will need to pay taxes on the income you receive under the plan in the year that you receive it.

If a 453 Plan is right for you, Milestone will be your partner through the entire process of establishing your plan. It’s a good idea to also consult with a tax professional to ensure that you are following all of the necessary steps in complying with relevant tax laws and regulations.

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