Business Swaps and 1031 Exchanges

1031 exchanges are commonplace for owners of gas stations, convenience stores, apartments, restaurants, franchises, motels, golf courses and self storage facilities. Owners will typically swap one business for another similar business. Each business has real and both intangible and tangible depreciable personal property that when sold triggers federal and state capital gains tax along with a 25% recaptured depreciation tax. If the real and personal property are replaced with equal or greater value and the personal property is replaced with like-kind personal property, the taxes can be deferred until the replacement property is sold. At that time the owner can decided whether to continue the tax deferral by initiating another 1031 exchange.

Business swaps are made up of businesses with real estate, intangible and tangible personal property such as fixtures, furniture, automobiles, trucks and a variety of equipment. The intangible personal property must be evaluated to determine whether it is eligible for 1031 consideration. The tangible personal property is itemized by a like-class standard found in the thirteen General Asset Classes described in Revenue Procedure 87-56 or six digit product class found in the North American Industry Classification System (NAICS). The tangible personal property is exchanged for assets of like-kind or the same asset or product class.

At one time, the procedure was to aggregate the assets of a business as a single asset and exchanged for a single asset. The Internal Revenue Service later clarified its position that real property is segregated from the personal property. The personal property is further grouped into like-kind assets. A value is determined for the sales price of each group and sold in a multiple property exchange transaction.

Atlas 1031 Exchange suggests this type of exchange should not be entered into without the counsel of their professional advisors.