Many people conducting mergers, acquisitions and the purchase and sale of businesses have so many things in the air to keep track of, that they often lose sight of the important tax efficiencies under section 1031.
The Most Tax Efficient Way to Sell Business Property
Remember, if we convert a transaction from a sale to an exchange, under section 1031, we can defer all the taxes on the disposition of like kind property indefinitely. The fundamental requirements of section 1031 are as follows: The relinquished property that is given up must have been held for investment or for use in a trade or business, it must be exchanged for like-kind property that must also be held for an investment or for use in a trade or business. By characterizing the transaction as an exchange, as opposed to a sale, we get to defer or have the gain go unrecognized indefinitely.
1031 Exchange Rules
Imagine we are selling a restaurant chain. Each of those restaurants sits on real estate and have some buildings or improvements that are considered real estate. Real estate is very easy to implement a 1031 exchange on. As a matter of fact, when most people think of 1031 exchanges, they often think of commercial real estate because commercial real estate is frequently exchanged as opposed to sold.
Some Property will Not Qualify for 1031 Exchanges or Deferral of Taxes
Remember that the good will of one business will never be considered like-kind to another business’s good will. This comes out of the treasury regulations [1.1031(a)-2(c)], so unfortunately part of the sale of the business will likely be subject to some tax. It’s a good idea to set out in your asset purchase and sale agreement, some value for good will. Attribute your value to it, pay your taxes on it; but as to the other components, the real estate, you want to layer in a 1031 exchange to get the most tax efficient disposition of the business as a whole.
Like-Kind Exchange Services
At Commercial Partners Exchange Company, our like-kind exchange intermediaries have over two decades of experience facilitating 1031 exchanges for clients. We can help you through every stage of your 1031 exchange by answering your questions, preparing your documents, and making everything as easy as possible for you. Get help with your like-kind exchange today by contacting our qualified intermediaries at our Minneapolis office.
Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.
Defer the tax. Maximize your gain.
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