Franchise

Business for Sale – Multi Asset 1031 Exchange

Posted on | by Tom Gustafson | Leave a Comment on Business for Sale – Multi Asset 1031 Exchange


Multi asset 1031 exchanges apply to sales of apartments, motels, dry cleaners, laundromats, gas stations and variety of franchises including self storage facilities, convenience stores, fast food, automotive and technology service providers. Each has in common real and personal property that can be sold and capital gain and recaptured depreciation taxes deferred when real and personal property are replaced in an Internal Revenue Service (IRS) 1031 tax deferred exchange.

Fast Food Franchise

For example, a Chicken Express franchisee may wish to relocate to a better location or different city. When the sales contract is drafted, it is advisable to assign values to the real and personal property. This allows for an allocation of gain to underlying assets. Real property is matched to real property, while personal property is grouped together. Goodwill or going concern value is excluded. Following the closing, identification of the replacement property must be received preferrably by the Qualified Intermediary.

Incidental Rule

The 1031 identification rule requires that real and personal property are identified by the 45th calendar day post closing of the first property in the exchange. Personal property considered incidental to the larger property is not treated separate given the value does not exceed 15% of the aggregate fair market value of the larger property.

  • For example, a self storage facility may have a fence, gate and personal property perhaps associated with the tenant managing the property. Given the value of the personal property sold does not exceed 15% of the gross sales price, the personal property does not need to be itemized on the identification form.
  • If the value does exceed 15%, then the personal property is grouped into one of thirteen like-kind General Asset Classes or North American Industry Classification System (NAICS) and listed as a group of potential replacement property. If three or more properties are to be identified, it is suggested to use the 200% rule when identifying versus the three property rule.

Identification

Utilizing the two hundred percent rule allows four or more properties to be identified. Property identified should not exceed 200% of the relinquished property value otherwise, 95% of what has been identified must be acquired.

In the case of the fast food franchise, the identification may include up to three locations and a fourth identification of personal property group if the value exceeds 15% of the gross sales price.

1031 Benefits

The benefits of an IRS 1031 tax deferred exchange are:

  • indefinite interest free loan of taxable dollars
  • relocation
  • consolidation
  • depreciation
  • diversification
  • replacement of under performing asset.

1031 exchanges provide business owners with the capability to make changes to their overall business structure without the cash outlays for capital gains and recaptured depreciation taxes. The tax obligation is not eliminated, only deferred until the sale of the replacement property.

Conclusion

When exchanging a multi asset property such as a franchise, the personal property does not need to be identified given the 15% incidental rule.

Considering selling your franchise or a business and need to make improvements to the replacement property? An improvement or build to suit exchange is used to make improvements to the parcel.

Subway Franchise 1031 Exchange

Posted on | by Tom Gustafson | Leave a Comment on Subway Franchise 1031 Exchange

“I could not be happier with the outcome and the confidence I have in Atlas 1031 Exchange. Andy did what he said he would do and kept me informed of the progress and what I needed to do. I will be working with Andy again in the near future.”

The Subway owner called to discuss how a 1031 exchange could help him transition into a new business. After the initial discussion, I spoke with his attorney to further understand his client’s transaction. As the sub-lessee of a thirty plus year lease, the lessee allowed him to sell his lease interest to exchange for real property. The IRS considers a thirty or more year lease as real property and eligible for a 1031 tax deferred exchange.

The exchange is now completed with the Subway owner owning real property in preparation to open a new business not related to the food industry. The owner found working with Atlas 1031 wonderful and very professional. He remarked that plenty of time was provided to answer his questions and understand the particulars as they related to the 1031 exchange.

Subway Owner
Albuquerque, NM

1031 Tax Consequences of Selling Business Assets

Posted on | by Andy Gustafson | Leave a Comment on 1031 Tax Consequences of Selling Business Assets

When selling a business, consideration of the tax consequences, including a 1031 exchange is often not at the top of the list. Following a meeting with your CFO or CPA, the federal, state and recaptured depreciation tax obligation is determined and now included in the dizzying array of outcomes as is the decision of whether or not to replace the assets. By replacing all or some of the assets, the federal, state and recaptured depreciation taxes can be deferred in a 1031 exchange. Rather than paying the tax, those dollars can be used towards as an interest free loan towards acquiring replacement property. The tax obligation does not go away, but is postponed; delayed until time the newly acquired property is sold. Another 1031 exchange is possible, or should the assets be inherited, the basis is stepped up to the heirs.

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