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Posted on Sun, 11/20/2011 - 06:33 AM by
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A Subway franchisee selling his location recently asked me if a 1031 exchange allowing the owner to defer the capital gain and recaptured depreciation tax could apply to his sale. The answer depends upon whether the franchisee wants to cash out or replace the real and personal property. He can also consider a Deferred Sales Trust (DST) tax deferral strategy that does not require replacement property and allows for proceeds to be invested in marketable securities and annuities. Timing, a type of property being sold and plans regarding future investments of net proceeds determine if tax deferral makes sense and which strategy is more appropriate. How to Determine the Right Tax Deferral Strategy There are a couple of questions to be asked before deciding on the tax deferral strategy. Is the property in contract or has it closed? If in contract, there is still time to determine the right tax deferral strategy. If the sale has closed, unfortunately, it is too late. Both the 1031 exchange and DST must be set up prior to the closing. The next question is if the owner wants to acquire replacement property. If the response is “yes,” then a 1031 exchange can make sense. 1031 Exchange The sale of a business is called a multi-asset exchange meaning real and personal property is sold. Good will is not eligible for a 1031 exchange, but if the gain is significant, a DST may be appropriate to defer the gain. In the sale of a Subway franchise, the property eligible for tax deferral includes:
Each can be exchanged independent of the other. Whatever is not exchanged may result in a recognized gain or tax. Tangible and intangible personal property must be exchanged for like-kind or like-class personal property while real property can be exchanged for any real property assuming both are located in the United States. Determine the gain by: A. Original Purchase Price + Improvements – Depreciation Taken = Adjusted Basis B. Sales Price – Adjusted Basis – Selling Expenses = Realized Gain C. Recaptured Depreciation Taken x 25 percent = D. Federal Capital Gain (Realized Gain – Depreciation Taken) x 15 percent = E. State Capital Gain (Realized Gain x State Capital Gain Rate) = Add C, D and E to estimate the recognized gain or tax due. This tax is deferred in a 1031 exchange given the exchange is accommodated by a Qualified Intermediary and the taxpayer did not have constructive receipt of the exchange funds. To defer the entire gain, the replacement property must be a value equal to or greater than the old property. Partial exchanges can also be accommodated. Forward and Reverse Exchanges There are two exchange strategies, a forward or reverse exchange. The forward exchange is when the old property is sold before the new property is acquired. In a reverse, the new property can be acquired before the old property is sold. Both strategies must be completed within 180 calendar days of the first transaction. Improvement and build to suit exchange strategies allow for improvements or new structure to be built using exchange funds. Alternative: Deferred Sales Trust If the taxpayer does not want to own replacement property a DST is an alternative to the 1031 exchange. The DST follows the typical sale, but at the closing the property is sold to a trust who in turn sells it to the buyer. The proceeds are invested by the trust in marketable securities and annuities approved by the taxpayer. The DST is similar to a Section 453 installment loan. Illustrations are available given the taxpayer answers a series of questions to determine whether the DST makes sense. Many QIs will also have the language imbedded in their exchange agreements allowing the taxpayer to convert to a DST deferring the gain in a failed exchange. Contact our office to discuss your transaction, given it is not too late. Learn more about the benefits of 1031 exchanges by downloading the e-Book created by Atlas 1031 for franchisee and business owners. Additional articles of interest include:
MORE NEWS FROM BLUEMAUMAUGoing Green Costs Franchisees Much GreenBeing forced to buy imaginary products is just one of the nonsensical results of government policy affecting franchisors and franchisees. Good News, U.S. Hotel Profit RecoveryAccording to the new PKF Trends survey, the U.S. lodging industry produced a 12.7% profit growth in 2011. 80.5% of participating hotels enjoyed an increase in total revenue while 72.3% achieved growth in profits. The recently released 2012 edition of Trends presents data from a sample of nearly 7000 financial statements of United States hotels. For the Trends report, hotel profits are defined as net operating income (NOI) before deductions for capital reserves, rent, interest, income taxes, depreciation and amortization. Federal Court Invalidates "Quickie" Union Election Rule, For NowOn May 14, 2012, the U.S. District Court for the District of Columbia set aside a controversial final rule of the National Labor Relations Board ("NLRB") that was designed to make it easier and faster for unions to hold organizing elections. Chamber of Commerce of the United States of America, et al. v. NLRB, Case No. 11-02262 (D.D.C. May 14, 2012). Business groups are hailing the decision, but the celebration may be short lived. Because the ruling was essentially decided on a procedural point, the NLRB may seek to resurrect the rule, which creates a very short window for union elections, and leaves employers with little time to react to an organized union campaign. Field Representatives Coach Franchisees to Victory
A good coach will make his players see what they can be rather than what they are. "Live For Now" Stars Dead IconPepsiCo announced aggressive marketing plans, boosting ad spending by 20% and bringing back deceased pop icon Michael Jackson as part of a worldwide campaign. RELATED SMALL BUSINESS NEWSHot Franchise Topic: Getting a LoanIt seems like the entire franchise industry is focused on funding, and with good reason; franchise loans are still a bit challenging to secure. Production Agreements of a Supply Chain; The Other End of the RainbowMany years ago I was pulled away from my usual assignments to do a major product production tolling agreement between two of America’s larger food companies. It was a stroke of luck for me because it provided something new for my interest in multivariate risks management. Since then I have prepared many multivariate high risk agreements, and it is always an enjoyable as well as remunerative adventure. When you think of every brand as a franchise in itself, it fits perfectly into my customary practice of managing franchise relationship disconnect issues. Know the Benefits of Application Protection in Any OrganizationIt is very important to ensure proper method of data availability on time. In that case, replication needs to be adopted in order to manage current backup information and system settings so that it can deliver fast restoration of data after any kind of disaster. As we know that it is not possible to avoid any kind of natural disaster or human error; but it is always mandatory to take proper measures for application protection, so that users do not face any kind of problem related to data loss. And, data replication is found to be the only way to remove or minimize the time lapse experienced in these situations. Pepsi Wants a New GenerationEverything the light touches this year is rapper Nicki Minaj’s kingdom. From the Billboard Top 100 to the Super Bowl half-time show, and her reign is about to expand to a major role in a new ad campaign for Pepsi. A Business Plan Should be a Requirement for Buying a FranchiseVisit any website that offers advice on starting a new business or expanding an existing one and you’ll find articles and advice on the importance of writing a business plan. There are tips ranging from how to write an effective business plan to the reasons why it’s so important. |
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