Newbridge Exchange, LLC

All too often, the exit planning from an existing business is done after the sales contract has been inked.  This strategy is doomed to lead to high taxes and failed expectations.  Successful departures will be designed early in the process, ideally as soon as at the time of inception of the business.  Partnership or family ownership division of assets can be equalized if sufficient time has been provided to effectuate a plan.

Most businesses will have a combination of real property and personal property such as furniture, fixtures, equipment, customer lists, websites, goodwill, contract rights and a trade name.  For tax purposes, these assets are segregated on the books and records of the business and have to be accounted for separately upon sale.

Allocating the sale price to the various categories can be challenging, however understanding the opportunity to defer recapture of previously taken depreciation (subject to tax at 25%) andcapital gains tax (subject to tax at 15%) and state capital gains tax (ranging from 0%-9%) should be paramount in the planning process.  Aggregated, the tax can be significant and several strategies are available to defer the taxes completely.

The most important aspect is to understand the goals and objectives of the business owner.  While cash is always the gold standard, touching it can lead to unintended tax consequences.  If the sale of business assets leads only to cash, the long hard work of achieving equity can be diminished by over 30%.  A strategy that utilizes a multi-faceted Section 1031 approach can keep all of the cash intact and tax deferred.

Since the majority of the business assets are often times invested in real estate, a Section 1031 Exchange will produce optimum tax relief.  The first step is to engage Newbridge Exchange, LLC as Qualified Intermediary (QI) to guide the sale of the property as an exchange. At closing, the net proceeds of the real property will be redirected to the QI for the acquisition of “like-kind” new or Replacement Property.  This can be any kind of real estate and located anywhere in the United States.

In addition, it can be more than one piece of property.  The value is exchanged, not the quantity, quality or character of the old or Relinquished Property.  The Replacement Property options are as varied as stand alone whole interest in real estate, partial interest, Tenancy-In-Common (TIC) interest, Umbrella Partnership Real Estate Investment Trust (UP-REIT), and subsurface real estate in the form of Oil and Gas Leases.  A combination of any of these options will produce a diversified portfolio of income producing property. Remember, since the net tax effect on the business owner could easily approach 30%, this savings significantly increases buying power of any one, or combination of these strategies.

One option is to exchange a portion of the real estate proceeds into a house at the shore or in the mountains. Under Section 1031, the business owner need only to rent the property for 2 years, then he can sell his current residence (and take advantage of Section 121) and convert his rental property into his primary residence, which just happens to be his dream home.

Reinvestment of the assets will produce a steady stream of income, and they can be as passive or active as the soon-to-be retired business owner desires.  The benefits are encased in what the cash can acquire and not the cash itself. The selling of a business is typically the largest transaction in the business owner’s career, failing to recognize the available tools, specifically the advantages of Section 1031, can have devastating effects on the business owner’s future quality of life. A key rule of thumb is to always remember to plan the exit from a business, not the cash that took so long to accumulate.