Tax deferred exchanges can be very beneficial to franchise owners when it comes time to sell an existing franchise in favor of adding one or more new locations. Under these circumstances, failure to be familiar with I1031 tax deferred exchanges and the financial benefits of their application can result in the needless payment of taxes upon the sale of an existing location.
How and why does this happen? On an annual basis, franchisees typically claim depreciation for the furniture, fixtures, equipment and other assets that comprise the value of a franchise. This accelerated depreciation helps reduce taxes on the income of your operation. In return, the IRS requires an equal reduction in the cost or tax basis of the assets on your tax books.
You may be considering selling a franchise and acquiring one or more locations with greater chance of future appreciation. Or your decision to sell might be motivated primarily by a desire to move to another location in the same city or elsewhere in the country. In either case, the amount you obtain for the assets of your current location are likely to exceed not only the depreciated value of the assets on your tax books, but also the original price you paid for these assets. Unfortunately, this combination of recapture taxes and capital gain taxes will take away a large percentage of your profit upon sale.
This tax can be deferred in whole by creating a tax deferred exchange transaction. Due to recent simplifications in IRS rules, exchange transactions have little effect on how you market your current location or how you acquire a new one. An exchange, however, can have a major financial benefit to you by reducing taxes payable this year and increasing current cash flow.
Contact Us About How to Structure a Franchise Exchange
As a national leader in complex exchange transactions, Accruit provides 1031 exchange services for franchises in addition to specializing in reverse, build‐to‐suit and improvement exchanges as well as simple forward exchanges of real estate and personal property. Contact us for more information regarding Accruit’s qualified intermediary and exchange accommodation titleholder services. Our specialists will work with the property owner and their attorney, if applicable, to carefully structure the exchange transaction using the arrangement that is best suited to the facts of the individual transaction.