If you own the building and real estate that your business operates in you are in an excellent position for the sale of your business. You can keep the real estate and lease it back to the buyer; but you can also sell the property with the business and either do a 1031 exchange or sell the property and use a tax strategy to minimize your tax liability.
The SBA revised lending rules in 2018 to allow transactions with over 51% of the purchase price allocated to real estate to be treated as if the entire transaction is a real estate transaction. SBA Business Acquisition 7a loan terms are 10 years at Prime + 2.75% and SBA real estate, 504, loan terms are 25 years, 2.3% to 2.8% (as of June 2020). The new SBA rule allows a buyer that purchases a business with the real estate to obtain 25 year financing at a much lower interest rate for the entire transaction.
If you opt to keep the building and lease it back to the buyer you defer the taxes on the sale of the property, create an ongoing stream of income from the lease, and since you are the landlord, you control the lease which assures there will not be a problem in obtaining a reasonable lease when you sell your business.
Business owners often do not wish to be the landlord of the business and new owner. Selling the property does not necessarily mean you have to pay taxes when the transaction closes. You can work with one of our Tax Strategy CPAs to minimize the taxes or opt to do a 1031 exchange, acquire a similar property, and defer the taxes on the sale of the property.
By employing either a Tax Strategy or a 1031 Exchange you can defer most if not nearly all of the taxes and with one of the tax strategies available through the CPAs and Tax Attorneys we work with you can substantially reduce your overall tax burden.
The 1031 exchange in simple terms allows a commercial or income property owner to sell a property and purchase a similar property within 180 days without paying taxes on the sale of the first property. There are a number of strict conditions tied to a 1031 exchange. The most stringent is the timeline for identifying prospective acquisition properties and closing before the deadline. This timeline is often difficult to achieve in the California real estate market. Consult your tax advisor regarding this and read more about 1031 exchanges here.
Wikipedia 1031 exchange https://en.wikipedia.org/wiki/Internal_Revenue_Code_section_1031
1031 Exchange FAQs http://www.1031exchange.com/faq/
Because of the strict 1031 rules and timelines, as well as the requirement to become an active landlord, many of our sellers have opted to implement a tax strategy so they can be a passive investor. There are several tax strategies available, but in general they allow the seller to invest the proceeds into a trust with most the taxes deferred until the money is taken out of the trust. We can arrange a complimentary meeting with one of the Tax CPAs we work with and they will explain your options and savings.
If you choose to sell the real estate this makes the business very attractive to buyers. The opportunity to purchase real estate with the business gives the buyer a secure asset that will appreciate in value and locks in the building-facility operating expense, reducing their risk for ever increasing lease expenses.
The purchase of the real estate can be financed with an SBA 504 loan with favorable terms for the buyer, again, making this a very attractive purchase and effectively a cash transaction for you.
If you are considering the sale of the real estate with your business consult with us before you make any decisions regarding the sale of the real estate.