CONNECT

Address:

425 N. Martingale Rd, Suite 200
Schaumburg, IL 60173

Phone:

Mike McCarthy 847-944-7920,Elias Friedman 847-944-7922,Cynthia Bridges Jones 847-944-7944,Meredith Fiocchi 847-944-7921,Kim Smith 847-944-7923,Jennifer Shulman 847-944-7912Toll-Free 844-378-5237

Fax/Other:

847-944-7933

What is IRC Section 1042?

Under IRC Section 1042, a selling shareholder may roll the cost basis from their company shares sold to the ESOP into a commensurate investment if the transaction meets certain requirements. Much like IRC Sections 1031 and 1035 with real property and insurance policies, a 1042 transaction is a type of like/kind exchange.  The shareholder may replace their current holdings, (stock in a U.S. domiciled operating business), with stocks or bonds of a U.S. domiciled operating business. The property they choose must meet certain requirements and must meet the IRS standard for a Qualified Replacement Property (QRP), under the statute. Unlike Sections 1031 or 1035, Section 1042 only provides one opportunity for purchase of the QRP. Once those elections have been filed with the IRS, if those securities are ever sold, called, or mature, it will trigger the capital gain on that pro rata portion of the QRP portfolio at the then capital gains rate.

Our team specializes in helping to build out a proper QRP portfolio that not only meets the requirements but can ultimately outlive the selling shareholder, allowing for a step up in tax basis upon death and a permanent deferral of the capital gain. We would be happy to discuss the nuances of this transaction further as it is a complex investment strategy and should be done only by those with experience specifically regarding Section 1042.

Please refer to our piece “ESOP: IRC Section 1042 Transaction”.

1042 Whitepaper

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