1031 Exchanges Help Owners Grow their Business and Plan Exit Strategy
Most investors realize that 1031 tax-deferred exchanges provide a great vehicle to accomplish their short and long-term investment objectives. However, exchanges also create a vast array of opportunities to help business owners grow their business and preserve their wealth. Following are a number of ways business owners can benefit from a 1031 tax-deferred exchange:
Relocation or Expansion
- Better Location
- Relocate to a new location that makes it easier to serve their customers. Whether it is a better designed property or closer to infrastructures that improve delivery, a 1031 exchange can help.
- When relocating, it often makes sense to sell rather than move many of the personal property assets and acquire new ones in the new location. This could include equipment, vehicles, client lists and even livestock if it happens to be a farmer relocating his farm.
- Tax Incentives
- Take advantage of tax incentives and abatements to relocate to a state or local opportunity zone.
- When acquiring new property secure financing through a redevelopment authority or SBA.
- Expand Footprint
- Sell one facility to acquire several others and expand the company’s footprint.
- Sell the company headquarters or one of its larger properties thru a sale leaseback. Leaseback the property through a triple net lease (NNN) and use exchange proceeds to lease one or more other locations and prepay rents and/or make leasehold improvements. A leasehold interest can be exchanged for fee interest in real property provided the lease term is 30 years or more including options.
Increase Efficiency and Profitability
- Exchange an outdated, inefficient building for a new facility that is better suited for the company’s growing needs.
- 1031 is not just for real estate. 1031 exchanges can also help business owners acquire new state-of-the-art furniture, fixtures and equipment to increase productivity and decrease operating costs. Keep in mind that any tangible or intangible personal property used for business use or investment can be exchanged under section 1031. However, when exchanging personal property, the definition of like-kind is less flexible than real property and the replacement property must be within the same asset classification code or the same type of asset if it does not fall into a classification code.
- Rolling assets, such a cars, trucks, buses, limousines, trains and aircraft, can be exchanged for newer ones.
Free up Capital
- After completing a 1031 exchange and reinvesting all of the equity in the replacement property, the business owner can refinance to free up funds to invest in the business. This refinance should not create a taxable event if planned properly.
Capitalize on Increased Depreciation Opportunities
- Replacement real estate with a greater value than the relinquished property creates “fresh” depreciation write-offs annually.
- Tangible and intangible personal property placed into service from 9/9/10 thru 12/31/2011 may be eligible for 100% bonus depreciation this year and 50% bonus depreciation for property placed into service in 2012 freeing up capital for the business.
Diversification of your Business
- Ready to try something different? A 1031 exchange enables you to exchange franchise agreements, distribution rights, client lists, liquor licenses and many other intangible assets. Whether it is a different type of franchise or one old one for two new ones, the gain may be deferred on the real estate, the franchise agreement, furniture, fixtures and equipment.
Developing an Exit Strategy
- As business owners look towards retirement, 1031 exchanges can help them exchange some of the real estate assets of their business for new income-producing property that will help replace the revenue stream provided by the business. Some net lease properties require little or no management so owners can enjoy retirement without the burdens of management.
- Retiring business owners can exchange into residential rental property in an area they would like to eventually live. After acquisition, the property can be used as a rental for several years and then converted to a primary residence or a vacation home. If moving into the property and selling his/her current residence, the owner can exclude up to $250,000 of gain ($500,000 if married, filing jointly) under Section 121.
While exchanges offer great opportunities for business owners to grow their business and keep their money working for them. Exchanges are also good estate preservation vehicles as the deferred gain is forgiven when the owner passes away and heirs receive the asset with a stepped up basis. Currently, the first $5,000,000 of an estate is exempt from estate taxes and the business owner had the opportunity to grow his/her business using pre-tax dollars during his/her lifetime.