Relocating a business can be an exercise in frustration. The search for new premises, unloading the current location, the logistics of moving and staffing—and then there are the taxes. All and all, it can be a headache.
But there are ways to ease the pain, especially where taxes are concerned. In the case of a client we’ll call Bill, we were able to use a maneuver called a 1031 Tax Exchange to help.
Bill owned a manufacturing firm in California. He wanted to relocate to Utah, and asked us to help him find an appropriate site for a factory. Complicating matters were the extreme valuations of California real estate—in the years that Bill had owned his factory there, the building’s value had skyrocketed, creating a capital-gains tax liability likely to be in the millions. During our conversation, we realized that Bill could defer taxes by creating a “swap” of one factory for another, the aforementioned 1031 Exchange (after section 1031 of the federal tax code).
A 1031 Exchange allows the owner of commercial or investment real estate to exchange one property for another, similar property and defer capital-gains taxes. It’s a valuable, if complicated, alternative to selling the first property outright, paying the taxes, and then buying the new one. There are very specific rules, which typically require a professional’s help to navigate.
For instance, the property seller needs to designate a replacement property within 45 days of the sale, and the swap must be completed within a six-month window. Any cash that changes hands during the transaction, even if used to pay off a mortgage, cannot be exempted from taxes. If you have a smaller mortgage on the new property than on the old property, the difference in mortgage liability is considered to be income and subject to taxes. Consult with an experienced advisor before going down this road.
This kind of exchange is a precision tool – it does not work in many cases. It is a good example of many strategies available to business owners contemplating significant projects like moving a factory. A sophisticated advisor will be able to sort through all the possibilities and find the ideal opportunities for your particular situation.
For other ideas to consider when moving or planning your business, download our free guide Five Factors To Consider Before Relocating Business To Southwest Utah by clicking on this link: http://www.vantageadvisorsllc.com/must-know