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1031 tax deferred exchanges and franchises have more in common than may you think. Generating cash flow is king while saving tax dollars is a close second. Over the past couple of years, I have accommodated exchanges for owners of franchises. What they each have in common was the sale of real and personal property and replacing real and personal property. By selling and replacing within 180 calendar days, the capital gains and recaptured depreciation taxes were deferred. Those deferred taxable dollars totaled roughly 40% of the sale and an interest free loan.
With the tightening of credit, franchisees have found conversion franchising as a method to tap alternative sources of lending available from the franchisor. Conversion franchising enables a franchisee to convert their successful independent business into becoming a part of an even larger national brand with the intent of increasing sales and cash flow thru the economies of scale of national advertising, new procedures and inventory sources to market awareness.
Recently, the Dwyer Group announced a large conversion franchising development program targeting plumbing, electrical, heating/cooling, restoration, appliance service, glass replacement and landscape management companies to join their franchise, converting into one of their Dwyer Group programs.
Franchisees needing to sell real or personal property to replace with a better location (real property) and new equipment, can defer the capital gains and recaptured depreciation taxes triggered upon sale through a 1031 exchange by replacing with real and personal property within 180 calendar days from the sale.
Independent business owners considering conversion franchising or selling an existing franchise, 1031 tax deferred exchanges should be on your list of "must do" considerations. For those interested in selling and building a new location: