Starting and growing a small business is no easy task. There are many challenges and obstacles to overcome, and it can create more financial hardships than it makes good fortunes. But when a small business grows and flourishes, 1031 exchanges provide support to small business owners needing a larger workspace, to relocate to a more prominent area for their business offerings, or an expansion to different properties. So, what's stopping small business owners from continuing the upward trajectory they have invested in?
One reason could be taxable gains. Taxable gains are profits from the sale of any asset and subject to taxation. So, suppose a small business owner of a salon, restaurant, or bakery wants to sell their current property and buy a bigger one. In that case, they might hesitate to do so because if they receive the money from the sale of the old property, the IRS views that as receiving the sale's profit and will tax that money. The sale will still be taxed even if the money from the sale all went towards a new property, your business, and you received no monetary gain.
How Do 1031 Exchanges Support Small Businesses?
Section 1031 of the Internal Revenue Code (IRC). The comprehensive set of tax laws created by the Internal Revenue Service (IRS). This code was enacted as Title 26 of the United States Code by Congress, and is sometimes also referred to as the Internal Revenue Title. The code is organized according to topic, and covers all relevant rules pertaining to income, gift, estate, sales, payroll and excise taxes. Internal Revenue Code is a beneficial strategy allowing the owner to defer their gain by structuring the property sale and purchase as an exchange. By deferring taxes owed to the government, more cash is available to buy new property. The intended purpose of a 1031 exchange is to aid in the continuity of investment, allowing an investor, in this case, a business owner, to keep investing and growing their company.
Many myths and misunderstandings surround this section of the tax code; thoughts like only the wealthy can use it, an exchange must be costly, or it's a loophole that taxpayers should not utilize. These statements couldn’t be further from the truth. The benefits are not only to the business owner but expand to all areas of the economy and environment. Today, 1031 exchange real estate investors choose more and more to invest in social impact projects benefiting neighborhoods and communities. With access to more capital, they also improve properties to make them more energy-efficient, helping the environment. Growth leads to the creation of more jobs and opportunities.
Navigating the business world and trying to grow a company or a brand is a part of being a business owner. What doesn’t have to be, is struggling to invest in your future.
1031 Exchange Advantages
There are many benefits to leveraging 1031 exchange; however, some costs and considerations are present that taxpayers should consider when contemplating whether or not to execute an exchange. (“Exchangor" or "Exchanger") Individual or entity desiring an exchange. Taxpayer s should always consult with their independent tax and legal professionals when contemplating whether or not to execute a Section 1031 exchange.