SPE 1031

Does this sound too good to be true? Many of your competitors, rental companies, dealers, contractors are already using 1031 Exchanges to sell business assets and defer the payment of taxes on the gain provided they use the proceeds to acquire additional business assets.

What does 1031 Exchange mean? 1031 Exchange transactions have been permitted under federal tax law since 1921. [Section] 1031 refers to the particular section in federal tax law. Exchange means any purchase, sale or trade of business assets within 180 days handled by a “Qualified Intermediary.” A Qualified Intermediary (QI) is an individual or entity (1) that is not related to or associated with the Taxpayer; and (2) who is responsible for documenting the transaction under federal tax law.

A 1031 Exchange transaction can be handled in either direction, i.e., a sale followed by a purchase, or a purchase followed by a sale. This includes virtually all types of business assets, including depreciable property, intangible assets such as patents, copyrights, customer lists, market share, and other assets, as well as collectible assets, such as artwork and autos.

Reduce Taxes, Re-invest Proceeds. Typically, taxes on these assets range from a low of 25% to a high of 45%. By reinvesting 100% of the sale proceeds into the new assets, the 1031 Exchange transaction reduces debt necessary to acquire new assets. This also reduces interest expense, increases gross profit margins and the amount of working capital available to produce additional revenue.

Example: Impact of 1031 Exchanges on Internal Rate of Return
Company A purchases a new truck for $14,500 in order to accommodate additional delivery needs and eliminate additional repair costs for an older truck. The Company is able to earn an average additional net income of $2,425.00 per year, plus an additional $2,300 from the sale of the truck at the end of 6 years. This transaction results in a 4.18% internal rate of return for the Company.

In the alternative, if Company A had entered into a Section 1031 Exchange and purchased the new truck with $14,500 of Exchange proceeds from the sale of an older truck, the estimated tax savings of $5,800 [40%], would increase the internal rate of return from 4.18% to 21.32%, a five fold increase.

Section 1031 Exchanges can be fairly complicated so it is important to have an experienced Qualified Intermediary, like Strategic Property Exchanges, LLC, guide you through the statutory requirements and protect your Company from tax penalties on incorrectly handled exchanges.

For example, many taxpayers assume incorrectly that trade-ins automatically qualify. Furthermore, a Form 8824 must be filed for every transaction to qualify as an Exchange.

Depend upon Strategic Property Exchanges, LLC to provide an iron-clad protection from errors, mistakes, and IRS challenges to your 1031 Exchanges.