Retirement Success Story: Selling The Business Property

In our last two blogs, we shared examples of how investing in stocks and mutual funds allowed our clients in those stories to retire. This week, we want to focus on a different type of retirement success story: selling the family business property.

The family business and property

America is built on the tradition of family businesses, passed down from one generation to the next. For some, this business is tilling the fields as a hard-working farm family. For others, it might mean running the family motel or taking over the family store.

Regardless of what the family business involves, the family often owns the property where it operates, which they pass down from one generation to the next.

Under the current tax code, business property and business valuation gains receive a step-up in basis upon the parents' passing, meaning the adult child rarely owes taxes on the increases in value that the business and the property have realized over many decades (unless the value exceeds the estate tax thresholds).

However, the adult child often continues to run the family business for another couple of decades, meaning the business and property will continue to increase in value.

In one case, our client decided it was time to sell the family business rather than pass it on.

The sale

When selling the family business, the increase in value from when they inherited it to when they sold it was taxed. But the same is not true of the business property.

Instead, we helped them use a caveat in the tax code that let them keep deferring their gains while eventually moving into a diversified real estate portfolio. This complex strategy, which utilizes a 721 and 1031 exchange, saved them over a million dollars in taxes and converted their family business property into a quarterly income stream.

Under the tax code, exchanging one business property for another in the proper sequence lets you defer paying taxes on your business property gains until a future date or until your passing, when the gains are stepped up again for your heirs.

To take advantage of this unique tax strategy, many businesses have created tailored products that allow advisors to help clients diversify their investments,  create quarterly or monthly income, and defer taxation.

The structure

For our client, they chose our help to find the right business that would allow them to first complete a 721 exchange into a few rental properties, which were then 1031 exchanged into a diversified rental fund portfolio that is managed and contains thousands of rentals.

The benefits included avoiding an even greater tax burden when they sold their family business, preserving their property value by deferring taxes, and creating a steady income stream from a diversified real estate portfolio.

For our client, this was a win-win-win scenario and further bolstered their income in retirement while achieving an overall safer risk profile for their overall investment holdings.

We are here to help

If you are in a similar situation where your family business has a parcel or parcels of property that have appreciated greatly over time, considering a 1031 and 721 exchange into a diversified real estate fund could make sense for your cents.

We have helped clients navigate this complex process and would welcome the chance to help you determine what is right for your property and retirement plan.

Please call us today to schedule a consultation so we can learn more about your situation and how we can help. We look forward to speaking with you soon.