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.