Business Exit Strategy: 1031 Exchange
Business Exit Strategy: 1031 Exchange For Retirement, Relocation or Reinvention
If you own a business, you may want to sell it someday. Whether your goal is to retire, to relocate your business to another area, or to reinvent yourself as an owner of a different kind of business, you should engage in advance planning to take advantage of capital gains tax deferral benefits offered by the government. These benefits can increase the wealth that you have available for your new business or next phase of life. Regardless of your goal, consult well in advance of sale with a knowledgeable tax advisor and a 1031 exchange professional. Explore the possibility of deferring capital gains taxes on sale of business real estate, and on sale of tangible and intangible business assets. Although the 1031 Exchange option does not fit all cases, you should at least consider how it applies to your situation. Not to do so might mean “leaving money on the table,” as the saying goes. Why defer taxes and recapture? You may be able to put all of the sale proceeds into your next investment, rather than paying taxes and investing a reduced sum.
Securities and Advisory Services offered through Centaurus Financial, Inc., Member FINRA • SIPC, a Registered Investment Advisor. Centaurus Financial, Inc. and H&S Wealth Management are unaffiliated firms.
Retirement: Exchange your business real estate If you own the real estate associated with your business, Internal Revenue Code Section 1031 allows you to exchange that property for “like kind” real estate. The definition of “like kind” for real estate is very broad—to quote from the tax code: “property held for productive use in a trade or business or for investment.” In other words, if you own (or have equity in) the land and improvements related to your shop, gas station, hotel, or other business, you can exchange that property for any other investment real estate, whether it is a duplex that you purchase on your own to provide rental income, or a share in a large multifamily community, or shopping center, or office building, organized as a Delaware Statutory Trust (DST) to provide income to owners. Section 1031 allows a taxpayer to sell one investment property and exchange it for another investment property in order to defer the capital gains tax and depreciation recapture that may arise from the property sale. Why defer taxes and recapture? You may be able to put all of the sale proceeds into your next investment, rather than paying taxes and investing a reduced sum. It is crucial that you prepare for exchange in advance of sale, although you may identify the replacement property later. Why must you plan ahead?
H&S Wealth Management Robert A. Horning (866) 498-1031 [email protected]
Marcel G. Pahmer (714) 975-9033 [email protected]
www.HandSwealth.com Supervisory Branch: Centaurus Financial, Inc.
2300 E. Katella Ave., Suite 200, Anaheim, CA 92806
(800) 880-4234
Business Exit Strategy: 1031 Exchange
You cannot receive the sale proceeds directly in any account controlled by you, or the exchange will not be valid. Instead, you’ll arrange with an exchange “accommodator” or “qualified intermediary” to receive the proceeds and to pass them on to the seller of the replacement property. There are a number of other rules, regulations and guidelines that make it essential to work with an experienced 1031 exchange professional. Besides helping you through the process, he or she can help identify potential replacement properties.
There are a number of rules, regulations and guidelines that make it essential to work with an experienced 1031 exchange professional.
Whether or not you own the business real estate, and whether or not you decide that a 1031 exchange is right for you, you may still be facing many other financial concerns as you look toward retirement. H&S Wealth Management offers planning tools to determine the sufficiency of your income for retirement, and solutions including life insurance, fixed and variable annuities, long-term care insurance, and other investments that can help to make your retirement comfortable.
Relocation: Exchange your business real estate and/or business assets If you would like to move your business from one place to another— taking that business from the suburbs to a revitalized downtown, perhaps—you may qualify for a 1031 exchange, whether or not you own business real estate. Internal Revenue Code Section 1031 allows business owners to exchange “like kind” real estate or business assets for other “like kind” real estate or business assets. While “like kind” real estate is very broadly defined as “property held for productive use in a trade or business or for investment,” non-real-estate business assets are more strictly examined for “like kind” or “like class” exchange. Depreciable assets are considered “like kind” if they are within the same Product Class or General Asset Class as described in the North American Industry Classification System (NAICS), available online at http://www.census.gov/naics.
WHAT CAN BE EXCHANGED UNDER SECTION 1031 • Real estate • Tangible depreciable assets used in the business
(furniture, fixtures and equipment)
• Intangible assets including trademarks, client lists, licenses and
franchise agreements
• Leasehold improvements*
2
*Note: A leasehold interest with a term of 30 years or more, including renewal options, can be exchanged for a fee interest in real property. Leasehold interests with less than 30 years remaining under the lease are not like kind to a fee interest in real property but can qualify as like kind to other leasehold interests.
Business Exit Strategy: 1031 Exchange
WHAT CANNOT BE EXCHANGED UNDER SECTION 1031 • Goodwill • Covenants not to compete • Inventory • Securities, stocks, bonds or evidence of indebtedness
When you sell your business, you have the opportunity to exchange real estate for real estate, and business assets for like kind business assets. If you own the real estate where you operate a business, you can transfer your equity into a new business property or into any other investment real estate. Even if you don’t own real estate, you can exchange the value of your furnishings, equipment, client lists and franchises for other furnishings, equipment, client lists and franchises, deferring the taxes due on that portion of the sale. Until 2009, the IRS maintained that intangibles such as trademarks, trade names, mastheads and customer-based intangibles did not qualify as like kind property because they were too closely related to the “goodwill” or “going concern” value of a business, which is excluded from qualification by Treasury Regulation § 1.1031(a)-(2)(c)(2). That Regulation says that goodwill and going concern value are inseparable from a business and cannot be exchanged. However, in February 2009, the IRS released Chief Counsel Advice (CCA) 200911006, stating that trademarks, trade names, mastheads and customer-based intangibles may qualify as like kind assets for exchange if they can be valued apart from goodwill, and that in fact the presumption is that they can be. Other intangibles include patents, designs, software, trade secrets, web addresses and internet domain names, as well as licenses, permits, and franchise rights.
When you sell your business, you have the opportunity to exchange real estate for real estate, and business assets for like kind business assets.
When a business or franchise owner chooses to exchange business assets, he or she must allocate the consideration received for the various assets relinquished in the exchange among the NAICS Product Classes or General Asset Classes. The amounts allocated by class will be used to determine how much replacement property of each class must be obtained in the exchange to achieve full tax deferral. Determining the value of assets for exchange in the sale of a business is critical. The higher the value of the like kind assets, the more potential taxes can be deferred. It is important for both the seller and the buyer of the business to agree on this valuation (or purchase price allocation) since it will be reported to the government. Both seller and buyer are required to file Form 8594 for Asset Acquisition when not all assets are of like kind, showing the allocation, and both forms must match. The valuation should also be part of the purchase agreement. The seller benefits from a higher purchase price allocation for exchangeable assets. The buyer of the business
3
Business Exit Strategy: 1031 Exchange
can also benefit from the higher depreciation value of the assets, but it is likely that the buyer’s benefit may be reduced by an increase in property tax on equipment. It is essential to work with a tax advisor in advance to identify exchangeable assets and to strategize the optimal allocation of the sales price given the business owner’s future plans. Even with planning, a business owner may not be able to match up all of the allocations with like kind replacement assets, so some taxable remainder (or “boot”) is common. Notwithstanding some boot, the benefits of tax deferral can be enormous.
Reinvention: Exchange your business real estate and/or business assets
You’re not ready to retire, but you don’t want to continue in your current business…you could start your new life in the greatest financial situation possible with a 1031 exchange.
Securities and Advisory Services offered through Centaurus Financial, Inc., Member FINRA • SIPC, a Registered Investment Advisor. Centaurus Financial, Inc. and H&S Wealth Management are unaffiliated firms. The treatment of a transaction under IRS code section 1031 is complex and varies with the facts and circumstances of each investor. Investors should consult with a tax professional before considering a 1031 Exchange.
4
Maybe you’re not ready to retire, and you don’t want to continue in your current business, either. You have your eye on a small hotel, or bakery, or tour service. Something completely new and different. Good for you! You should start that new life in the greatest financial situation possible. Much of the foregoing discussion applies to you. If you own business real estate, you can exchange it for business real estate, deferring capital gains taxes and recapture of depreciation, and maximizing the dollars available for reinvestment. Even if your new business involves no brick and mortar office, because you’ll be providing services online or on-the-go, you can sell the existing business real estate and put the proceeds into another property designed to provide you with rental income, using the mechanism of a 1031 exchange. Whether or not you exchange real estate, you should consider exchanging business assets. You can exchange one computer system for another; one car for another; or one set of furniture, fixtures and equipment for another. If you are not moving to the same type of business as before, the “like kind” assets may be limited, but are still worth exploring with your tax advisor.
Ask us first! If you’re considering selling your business, whether to retire, to relocate, or to reinvent yourself as owner of a different kind of business, consult with H&S Wealth Management and a tax professional to review your options for 1031 exchange and other strategies to maximize your future financial well being.
Our goal is to keep our clients financially phi2t:
If you own a business, you may want to sell it someday. Whether your goal is to retire, to relocate your business to another area, or to reinvent yourself as an owner of a different kind of business, you should engage in advance planning to take advantage of capital gains tax deferral benefits offered by the government. These benefits can increase the wealth that you have available for your new business or next phase of life. Regardless of your goal, consult well in advance of sale with a knowledgeable tax advisor and a 1031 exchange professional. Explore the possibility of deferring capital gains taxes on sale of business real estate, and on sale of tangible and intangible business assets. Although the 1031 Exchange option does not fit all cases, you should at least consider how it applies to your situation. Not to do so might mean “leaving money on the table,” as the saying goes. Why defer taxes and recapture? You may be able to put all of the sale proceeds into your next investment, rather than paying taxes and investing a reduced sum.
Securities and Advisory Services offered through Centaurus Financial, Inc., Member FINRA • SIPC, a Registered Investment Advisor. Centaurus Financial, Inc. and H&S Wealth Management are unaffiliated firms.
Retirement: Exchange your business real estate If you own the real estate associated with your business, Internal Revenue Code Section 1031 allows you to exchange that property for “like kind” real estate. The definition of “like kind” for real estate is very broad—to quote from the tax code: “property held for productive use in a trade or business or for investment.” In other words, if you own (or have equity in) the land and improvements related to your shop, gas station, hotel, or other business, you can exchange that property for any other investment real estate, whether it is a duplex that you purchase on your own to provide rental income, or a share in a large multifamily community, or shopping center, or office building, organized as a Delaware Statutory Trust (DST) to provide income to owners. Section 1031 allows a taxpayer to sell one investment property and exchange it for another investment property in order to defer the capital gains tax and depreciation recapture that may arise from the property sale. Why defer taxes and recapture? You may be able to put all of the sale proceeds into your next investment, rather than paying taxes and investing a reduced sum. It is crucial that you prepare for exchange in advance of sale, although you may identify the replacement property later. Why must you plan ahead?
H&S Wealth Management Robert A. Horning (866) 498-1031 [email protected]
Marcel G. Pahmer (714) 975-9033 [email protected]
www.HandSwealth.com Supervisory Branch: Centaurus Financial, Inc.
2300 E. Katella Ave., Suite 200, Anaheim, CA 92806
(800) 880-4234
Business Exit Strategy: 1031 Exchange
You cannot receive the sale proceeds directly in any account controlled by you, or the exchange will not be valid. Instead, you’ll arrange with an exchange “accommodator” or “qualified intermediary” to receive the proceeds and to pass them on to the seller of the replacement property. There are a number of other rules, regulations and guidelines that make it essential to work with an experienced 1031 exchange professional. Besides helping you through the process, he or she can help identify potential replacement properties.
There are a number of rules, regulations and guidelines that make it essential to work with an experienced 1031 exchange professional.
Whether or not you own the business real estate, and whether or not you decide that a 1031 exchange is right for you, you may still be facing many other financial concerns as you look toward retirement. H&S Wealth Management offers planning tools to determine the sufficiency of your income for retirement, and solutions including life insurance, fixed and variable annuities, long-term care insurance, and other investments that can help to make your retirement comfortable.
Relocation: Exchange your business real estate and/or business assets If you would like to move your business from one place to another— taking that business from the suburbs to a revitalized downtown, perhaps—you may qualify for a 1031 exchange, whether or not you own business real estate. Internal Revenue Code Section 1031 allows business owners to exchange “like kind” real estate or business assets for other “like kind” real estate or business assets. While “like kind” real estate is very broadly defined as “property held for productive use in a trade or business or for investment,” non-real-estate business assets are more strictly examined for “like kind” or “like class” exchange. Depreciable assets are considered “like kind” if they are within the same Product Class or General Asset Class as described in the North American Industry Classification System (NAICS), available online at http://www.census.gov/naics.
WHAT CAN BE EXCHANGED UNDER SECTION 1031 • Real estate • Tangible depreciable assets used in the business
(furniture, fixtures and equipment)
• Intangible assets including trademarks, client lists, licenses and
franchise agreements
• Leasehold improvements*
2
*Note: A leasehold interest with a term of 30 years or more, including renewal options, can be exchanged for a fee interest in real property. Leasehold interests with less than 30 years remaining under the lease are not like kind to a fee interest in real property but can qualify as like kind to other leasehold interests.
Business Exit Strategy: 1031 Exchange
WHAT CANNOT BE EXCHANGED UNDER SECTION 1031 • Goodwill • Covenants not to compete • Inventory • Securities, stocks, bonds or evidence of indebtedness
When you sell your business, you have the opportunity to exchange real estate for real estate, and business assets for like kind business assets. If you own the real estate where you operate a business, you can transfer your equity into a new business property or into any other investment real estate. Even if you don’t own real estate, you can exchange the value of your furnishings, equipment, client lists and franchises for other furnishings, equipment, client lists and franchises, deferring the taxes due on that portion of the sale. Until 2009, the IRS maintained that intangibles such as trademarks, trade names, mastheads and customer-based intangibles did not qualify as like kind property because they were too closely related to the “goodwill” or “going concern” value of a business, which is excluded from qualification by Treasury Regulation § 1.1031(a)-(2)(c)(2). That Regulation says that goodwill and going concern value are inseparable from a business and cannot be exchanged. However, in February 2009, the IRS released Chief Counsel Advice (CCA) 200911006, stating that trademarks, trade names, mastheads and customer-based intangibles may qualify as like kind assets for exchange if they can be valued apart from goodwill, and that in fact the presumption is that they can be. Other intangibles include patents, designs, software, trade secrets, web addresses and internet domain names, as well as licenses, permits, and franchise rights.
When you sell your business, you have the opportunity to exchange real estate for real estate, and business assets for like kind business assets.
When a business or franchise owner chooses to exchange business assets, he or she must allocate the consideration received for the various assets relinquished in the exchange among the NAICS Product Classes or General Asset Classes. The amounts allocated by class will be used to determine how much replacement property of each class must be obtained in the exchange to achieve full tax deferral. Determining the value of assets for exchange in the sale of a business is critical. The higher the value of the like kind assets, the more potential taxes can be deferred. It is important for both the seller and the buyer of the business to agree on this valuation (or purchase price allocation) since it will be reported to the government. Both seller and buyer are required to file Form 8594 for Asset Acquisition when not all assets are of like kind, showing the allocation, and both forms must match. The valuation should also be part of the purchase agreement. The seller benefits from a higher purchase price allocation for exchangeable assets. The buyer of the business
3
Business Exit Strategy: 1031 Exchange
can also benefit from the higher depreciation value of the assets, but it is likely that the buyer’s benefit may be reduced by an increase in property tax on equipment. It is essential to work with a tax advisor in advance to identify exchangeable assets and to strategize the optimal allocation of the sales price given the business owner’s future plans. Even with planning, a business owner may not be able to match up all of the allocations with like kind replacement assets, so some taxable remainder (or “boot”) is common. Notwithstanding some boot, the benefits of tax deferral can be enormous.
Reinvention: Exchange your business real estate and/or business assets
You’re not ready to retire, but you don’t want to continue in your current business…you could start your new life in the greatest financial situation possible with a 1031 exchange.
Securities and Advisory Services offered through Centaurus Financial, Inc., Member FINRA • SIPC, a Registered Investment Advisor. Centaurus Financial, Inc. and H&S Wealth Management are unaffiliated firms. The treatment of a transaction under IRS code section 1031 is complex and varies with the facts and circumstances of each investor. Investors should consult with a tax professional before considering a 1031 Exchange.
4
Maybe you’re not ready to retire, and you don’t want to continue in your current business, either. You have your eye on a small hotel, or bakery, or tour service. Something completely new and different. Good for you! You should start that new life in the greatest financial situation possible. Much of the foregoing discussion applies to you. If you own business real estate, you can exchange it for business real estate, deferring capital gains taxes and recapture of depreciation, and maximizing the dollars available for reinvestment. Even if your new business involves no brick and mortar office, because you’ll be providing services online or on-the-go, you can sell the existing business real estate and put the proceeds into another property designed to provide you with rental income, using the mechanism of a 1031 exchange. Whether or not you exchange real estate, you should consider exchanging business assets. You can exchange one computer system for another; one car for another; or one set of furniture, fixtures and equipment for another. If you are not moving to the same type of business as before, the “like kind” assets may be limited, but are still worth exploring with your tax advisor.
Ask us first! If you’re considering selling your business, whether to retire, to relocate, or to reinvent yourself as owner of a different kind of business, consult with H&S Wealth Management and a tax professional to review your options for 1031 exchange and other strategies to maximize your future financial well being.
Our goal is to keep our clients financially phi2t:
