IRS Takes a Closer Look at Spinoffs and the Tax-Free Exemption

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Normally taxes are applied when a corporation distributes property on behalf of its shareholders. As such, shareholders and the distributing corporation are required to pay taxes.

However, the spinoff provision of Section 355 of the Internal Revenue Service Code allows such a transaction to be tax-free if certain requirements are met. One such requirement is called the “business purpose.”  This business purpose must be beyond the spin-threshold requirements for tax-free reorganizations in general.

A second requirement for a tax-free spinoff is that the transaction will not be used as the cause for distributing profits and earnings. While there may be a number of reasons for a real estate spinoff, the main goal is to increase value for shareholders for both the spin and the parent.

The parent company usually determines that the property is no longer as financially productive, and that the spin will increase the value of the property that’s left. Showing proof that the transaction isn’t just to make a tax-free profit is where the challenge arises for companies spinning off properties. Both the transactions and the laws governing these transactions can be complicated.

It takes a real estate, legal and tax expert to fully understand the nuances involved.

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