Real estate and capital gains reduction can be a difficult subject to understand. Because real estate has unique features that liquid stocks do not have (e.g., real estate cannot be moved or taken off shore) and specific prohibitive laws, some of the traditional capital gains reduction solutions cannot be used. However, physician-investors, attorney-investors, business owner-investors, who want to sell a piece of real estate without incurring capital gains taxes do have a viable tax-saving option - an installment sale with the use of a third-party administrator, (TPA).

An installment sale with the use of a TPA is a nice way to use the government's money to increase the amount you receive (in the long run) from the sale of a piece of property. While you don't ultimately avoid the capital gains taxes, you are creating a scenario where the sale of a highly appreciated piece of real estate becomes much less painful when you're considering the tax ramification of the sale.

An installment sale is a contract to sell something - in this case, real estate - where the buyer pays the seller over a period of time. These sales are typically done when financing is difficult for the buyer, and in most cases the seller ends up self-financing the sale. By using an installment sale contract, you can defer a portion of the capital gains over an extended period of time (i.e., 30 years). Let's make an assumption that you own your practice's building and that the property is worth $2.1 million, with a cost basis of $1.1 million. You want to sell the property, but if you do, you'll have to pay $200,000 for capital gains taxes at the rate of 20% on the $1 million increase in value. In addition, because you're retiring, you to take a stream of income for 30 years. Therefore, you decide on an installment sale contract for over 30 years.

To avoid any risk associated with a traditional installment plan, you use a TPA. Using the same example, you would pay the entire $2.1 million to a TPA, who would pay you (ie, the seller) by the terms of an "installment" sale. Let's assume the terms of the installment sale are that you will be paid 1/30th of the sale price every year for 30 years. You will pay a capital gains tax each year on 1/30h of the base sale price of the property as you receive the installment payments.

What will you accomplish by doing this? Not much, unless the TPA invests your money. Again, let's assume you pay the entire $2.1 million to a TPA and enter into the same 30-year contract, only this time the TPA invests the money from the sale and it earns 8% a year. What will you accomplish if the TPA invests the money?

The first year following the sale, you will be able to use nearly $200,000. That's money that would have normally gone to the government for capital gains taxes. So instead of investing $1.9 million (after capital gains tax), in a traditional investment, the TPA invests nearly $2.1 million the first year on your behalf and pays you that installment sale price plus the growth on that money over a period of 30 years. If you took the $1.9 million after paying $200,000 in capital gains and that $1.9 million earned 8% in the market, you would have income of $152,000 without dipping into your principal. However, if you implemented the installment sale concept, you would instead have nearly $2.1 million to invest, and if it earned that same 8%, you would earn $168,000 the first year without dipping into your principal, $16,000 the first year in extra income if you didn't dip into the principal.

Many Physician-investors, Attorney-investors and Business owner-investors, accumulate real estate over their lifetime. It has always been a fore-gone conclusion that there will be capital gains taxes to pay on the sale of a piece of real estate. This may not be the case. Of, course, before you enter into an installment sale contract with the inclusion of a TPA, make sure you consult with your accountant or financial advisor. They will be able to confirm that the transaction meets all the applicable state and federal laws governing the sale of real estate.