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Section 1031 Advisor Newsletter

SECTION 1031 EXCHANGES CAPTURE VALUE IN THE PURCHASE AND SALE OF BUSINESSES

Inside this newsletter issue:

• Tax Deferral Benefits of Section 1031 Exchanges:  Expanded Horizons
  
• The Issue:  A Variety of Asset Classifications
• The Benefits of Section 1031 Exchange to the Seller – Business Owner
• The Threats
• The Opportunities
  

Tax Deferral Benefits of Section 1031 Exchanges:  Expanded Horizons.  In the case of the sale of real estate, the tax deferral benefits of a Section 1031 exchange  are familiar to investors and their Advisors. However, less well known is the use of a Section 1031 Exchange upon the purchase and sale of a variety of business and investment assets. If an Advisor is working with a client, who is contemplating the sale of a business, or a division of the business, and planning the reinvestment into same or similar assets, then a Section 1031 Exchange can provide tax deferral benefits for that client.

The Issue:  A Variety of Asset Classifications. In the sale of a business or a particular portion of a business, such as regional group of newspapers, a division of a printing company, or a line of business, such as a manufacturer of computer components, the assets of the business may be composed of several different Asset Classes.  These assets can include: (1) tangible assets, such as office equipment, furniture, fixtures, and transportation assets (planes, trains, trucks, and barges); (2) intangible assets, such as FCC licenses, patents, copyrights, workforce in place, subscription lists, customer lists, or government licenses; and (3) investment assets, such as collectibles, artwork, precious metals, and stamps.  Some types of assets, such as covenants not to compete and goodwill, are never exchangeable. Advisors need to correctly identify assets, so that assets are not erroneously identified as a non-exchangeable asset type.

The Benefits of Section 1031 Exchange to the Seller – Business Owner. By participating in a Section 1031 Exchange, the business can:

• Protect their cash flow from the sale of the business. Cash flow is the life blood of every business and is essential to solvency. Cash flow is crucial to an entity's survival. Having ample cash on hand will ensure that creditors, employees and others can be paid on time. Businesses with ample cash on hand are able to invest the cash back into the business in order to generate more cash and profit.
•  Minimize their  debt expense by reducing the amount needed to invest in new assets;  
• Reduce their overall tax burden by deferring income taxes on the sale. Typically businesses pay much higher rates of tax on the sale of business assets than Real Estate Investors.
• Reduce the overall cost of capital for the new business opportunity that the business invests in

The Threats. Sometimes, the process to sell the business is moving so quickly that the tax advisors do not have the opportunity to focus on tax deferral. Many times,  the Advisors may overlook the potential to defer immediate taxation on the sale of the business where the Seller intended to reinvest in same or similar assets.

Many times, subtle changes in the facts surrounding the business can torpedo an Exchange. It is important for the client (seller, business owner) and the Advisors to team up with a knowledgeable and experienced Qualified Intermediary.

The Opportunities. If a business is contemplating the sale of a business, or a division of its business, and if the business is planning reinvestment into same or similar assets, then it is crucial that the business and its Advisors consult with an experienced Qualified Intermediary (Q.I.).  The best case scenario occurs when the Qualified Intermediary has the expertise related to tax deferral strategies, and has the time to implement the strategies.

The Q.I. will identify which assets may be exchangeable, will properly classify the assets to be sold, and will determine how the transaction needs to be structured. Next, this information must be communicated with the business team, who may be looking for additional investment opportunities, in order to match up and align the replacement assets.

That’s where the professionals at Strategic Property Exchanges, LLC can help you and your clients. Stephen L. Robison, Esq, is a Qualified Intermediary and is a full time practicing tax attorney, who is Board Certified as a Federal Tax Specialist.  Mr. Robison, and our team of professionals, will work with you and your clients.  They will creatively and strategically assist you and your client with the sale or purchase of a business, in order to maximize the tax deferral opportunities. 

UPCOMING SEMINARS

December 5, 2007
Toledo, OH

Essentials of Section 1031 Exchanges,  Event # 41466
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December 11, 2007
Memphis, TN

Advanced Section 1031 Exchanges, Event # 41477
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December 12, 2007
Birmingham, AL

Advanced Section 1031 Exchanges, Event # 39187
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December 13, 2005
Knoxville, TN

Essentials of Section 1031 Exchanges, Event # 41476
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December 19, 2007
Cedar Rapids, IA

Essentials of Section 1031 Exchanges, Event # 41459
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December 20, 2007
Des Moines, IA

Essentials of Section 1031 Exchanges, Event # 41460

All seminars will be held 8:30 A.M. - 4:40 P.M.

For more information
visit the NBI website at www.nbi-sems.com