Franchise Conversions: Tax Implications When Brokerages Switch Networks (REMAX, Royal LePage, Century 21)

When a Brokerage Changes Networks: The Tax Risks You Can’t Ignore

Hook: If your brokerage is converting from Royal LePage or Century 21 to REMAX (or vice versa), you’re not just signing new logos — you’re triggering tax events that can cost you thousands unless planned correctly. Whether you own the brokerage, sell a book of business, or are an agent switching affiliations, understanding how franchise fees, goodwill, noncompetes and asset vs. stock structures are taxed in 2026 will determine your after-tax outcome.

Executive summary — what matters first

The most important takeaways for brokerages and agents in a franchise conversion:

• Franchise/transfer fees paid to acquire a new brand are generally capitalized and amortized over 15 years under IRC Section 197 (not immediately deductible).
• Goodwill and noncompete treatment drives tax results. Acquired goodwill and most covenants not to compete are amortizable by the buyer over 15 years (Section 197). For sellers, the character of proceeds depends on whether the transaction is an asset sale or a sale of ownership interests.
• Asset vs. stock sale choices change who gets the basis step-up and whether there is double taxation (C corporations) or ordinary tax on “hot assets” for partnerships and LLCs.
• Agents switching franchises must watch signing bonuses, buyouts, client-list payments, and noncompetes — these can be ordinary income, capital gain, or amortizable intangibles depending on structure and state rules.

Why 2026 is different — trends and enforcement priorities

The industry saw increased consolidation through late 2024–2025, with high-profile conversions and roll-ups creating more franchise-conversion events. In late 2025 many tax practitioners observed heightened IRS focus on allocations in acquisition documents — especially for intangible value assigned to goodwill and noncompete covenants. That trend continued into 2026 and means transactions are more likely to be examined. Proper documentation, valuation support, and deliberate tax elections are now essential to limit audit risk and preserve favorable tax outcomes.

How franchise fees and transfer costs are taxed

When a brokerage affiliates with a new franchisor there are typically several types of payments: initial franchise or conversion fees, ongoing royalties, and transfer or territory fees. From a federal tax perspective:

• Initial franchise/conversion fees paid to acquire a long-term right to use a franchisor’s brand are treated as intangible assets and amortizable over 15 years under IRC Section 197. This means the business cannot deduct the full cost immediately; instead it records an amortization deduction roughly equal to one-fifteenth of the fee each year.
• Renewal or continuing royalties that are essentially payments for ongoing services or marketing are usually deductible as ordinary business expenses when paid (subject to capitalization rules for advertising in some cases).
• Transfer or conversion fees — the fee paid to change affiliations — are commonly treated the same as initial franchise fees and capitalized. However, careful contract drafting is important: if a fee is clearly for a short-term service it may be deductible.

Quick example

If a brokerage pays a $75,000 conversion fee to switch to REMAX, it will typically capitalize and amortize that amount over 15 years, producing an annual amortization deduction of about $5,000. That timing matters for cash flow and tax planning.

Goodwill, noncompetes and Section 197

Goodwill and many other acquired intangibles are governed by IRC Section 197, which requires amortization over a 15-year period. Two points are critical:

• From the buyer perspective, acquiring goodwill (or paying for a covenant not to compete) means a 15-year amortizable intangible. This is a routine tax benefit because the buyer can take a steady amortization deduction.
• From the seller perspective, payment allocated to goodwill typically produces capital gain treatment rather than ordinary income — generally favorable. But the seller must ensure the allocation in the purchase agreement and the economic reality supports a sale of goodwill (not compensation for future services).

"Whether proceeds are treated as capital gain or ordinary income often depends more on the substance of the deal and the allocation schedule than on the label used in the contract."

Noncompetes — ordinary or capital?

Payments for a covenant not to compete can be either ordinary income or capital gain to the seller depending on facts and how the payment is allocated:

• If the noncompete is essentially payment for the seller's future services (e.g., the seller remains active), the IRS often treats proceeds as ordinary income.
• If the seller is fully exiting the business and the noncompete is part of a sale of goodwill and client relationships, the payment allocated to the noncompete may be treated as part of the sale price for intangible assets (subject to Section 197 rules), producing capital gain for the seller.

Asset sale vs stock (interest) sale — how the tax math differs

When an entire brokerage is changing hands during a conversion, parties must choose between an asset sale and a sale of ownership interests (stock sale for corporations or interest sale for partnerships/LLCs). The tax consequences are significant:

Why buyers favor an asset sale

• Buyer gets a step-up in basis in the purchased assets, enabling future depreciation and amortization deductions based on the purchase price.
• Buyer can allocate purchase price to assets with tax benefits (e.g., tangible assets to depreciable categories, intangibles to Section 197 amortization).

Why sellers favor a stock/interest sale

• Sellers generally prefer ownership interest sales because proceeds are taxed as capital gain on the sale of an investment (for C-corp shareholders there is complexity; for pass-through owners this often yields lower tax).
• Stock sales avoid the double taxation risk that arises when a C corporation sells assets (the corporation pays tax on the gain, and shareholders pay tax on distributed sale proceeds).

Important complications

• Section 1060 requires buyer and seller to agree on an asset allocation and report it to the IRS — valuations must be defensible.
• “Hot assets” (unrealized receivables and inventory) generate ordinary income on sale of a partnership or LLC interest under Section 751 and can convert part of the gain to ordinary income even in an otherwise capital transaction. Consider working-capital and inventory guidance such as that in reverse logistics and working-capital playbooks when modeling outcomes.
• Section 338 election may allow a buyer in a stock deal to treat the purchase as an asset acquisition for tax purposes — bridging buyer and seller preferences — but it carries complex consequences and must be timed and negotiated carefully. See technology and deal-execution writeups like enterprise adoption notes for analogous election-and-timing considerations.

Specific tax issues for agents who switch franchises

Most real estate agents are independent contractors. When they change affiliations during a brokerage conversion they must watch several potential tax traps:

• Signing bonuses or retention payments — generally taxable as ordinary income. Depending on structure, some may be treated as advances or reimbursements; documentation matters.
• Buyouts or broker payouts for trailing commissions — whether the payout is characterized as sale of a book of business or compensation affects whether it’s capital gain or ordinary income.
• Client lists and referral agreements — if you sell or transfer a client list to a new brokerage, the buyer will treat the purchase as a Section 197 intangible; the seller must confirm whether proceeds are treated as capital gain (sale of goodwill) or ordinary. Practical guides for documenting transfers and allocations (including seller schedules) are increasingly useful — for example, check field guides for seller and checkout workflows like field-tested seller kits for structuring transaction paperwork.
• Noncompete agreements — if you receive payment to limit future competition, structure and termination facts are decisive for tax character.
• Expenses and reimbursements — moving costs, marketing changes, signage — ordinary deductions may apply, but capitalized costs (like new franchise fees) are not immediately deductible.

Actionable checklist for agents

1. Get the written agreement for any signing bonus or payout. Confirm allocation between compensation and purchase of intangible assets.
2. Ask whether the buyer/brokerage will treat a client list or book sale as Section 197 intangible; insist on a written allocation in the purchase agreement.
3. Confirm whether state withholding applies to any sign-on or severance payments and whether Form 1099-NEC will be issued.
4. Document your exit date and any ongoing services; avoid being classified as providing future services if you want capital gain treatment for a sale.
5. Coordinate with counsel and a CPA before signing any noncompete or monetization agreement.

Valuation and allocation: the practical battlefront

Late 2025–early 2026 market activity has made valuation support more critical. The IRS looks closely at purchase price allocations to ensure buyers do not over-allocate to Section 197 intangibles in order to maximize amortization, or under-allocate to items that should produce ordinary income.

Key documentation that reduces audit risk:

• Independent business valuation reports supporting goodwill and client list values.
• Allocation schedules signed by buyer and seller (Form 8594 in asset sales).
• Clear agreements showing whether payments are for future services (ordinary income) or transfer of intangible property (capital gain).
• Consideration of state-specific tax rules and sales/use taxes on certain fees.

Common pitfalls and how to avoid them

• No allocation schedule: Failing to complete Form 8594 (asset sales) invites an IRS default allocation or mismatch examination. Always file and retain copies.
• Poorly drafted noncompetes: If the seller performs services post-closing the IRS may characterize payments as wages. Define a full exit or limit post-closing activity in the agreement.
• Ignoring state taxes: Conversions involving offices in multiple states (or Canada) create nexus and withholding issues. Consult cross-border counsel early.
• Missing the Section 338 window: If a buyer wants a 338(h)(10) treatment, both parties must agree and make timely elections; missing deadlines forecloses a key tax planning tool.

Practical structuring strategies (2026 advanced playbook)

Below are advanced strategies that clients are using in 2026 conversions — each requires careful legal and tax advice:

• Split consideration with allocation schedules: Negotiate the allocation of purchase price (or conversion payments) between tangible assets, Section 197 intangibles and goodwill. Support allocations with valuation reports to withstand IRS scrutiny.
• Use of earn-outs and contingent payments: Earn-outs can shift tax recognition and risk, but must be drafted to avoid recharacterization as compensation. Proper caps and precise metrics are critical.
• Section 338 elections: Buyers paying fair market value for equity can elect to treat a stock purchase as an asset purchase for tax purposes. This provides a basis step-up — valuable in competitive deals.
• Pre-closing clean-up: Convert or realize hot assets prior to an ownership sale where feasible to minimize ordinary income consequences under Section 751.
• Timing of fee payments: Strategically timing conversion costs across tax years can smooth the impact of Section 197 amortization and help manage taxable income, especially for pass-through entities.

Case study: A mid-size Toronto firm converts to REMAX (illustrative)

Facts: A family-owned brokerage with 17 offices and ~1,200 agents (similar to the Risi firms that converted in 2025) affiliates with REMAX. The owners remain in place and pay a conversion fee, an initial branding fee, and transfer some client lists.

Tax outcomes and planning steps:

• The conversion and branding fees are capitalized and amortized over 15 years by the brokerage; annual amortization must be accounted for in corporate or partnership returns.
• If client lists are transferred for consideration, treat the purchase price as a Section 197 intangible with buyer amortization and seller capital gain, but require a valuation and allocation schedule to support that position. Consider seller-side checklists and field-tested paperwork when documenting transfers.
• Owners should confirm whether any retained equity sale (e.g., strategic investor) is structured as a stock sale versus asset sale; tax counsel can model outcomes including corporate tax versus passthrough scenarios.
• Given multi-state (or cross-border) operations, analyze withholding and GST/HST implications in Canada and US state filing obligations, and coordinate cross-border tax counsel as needed.

Practical steps to take now — immediate checklist

1. Before agreeing to any conversion fee or payout, request and review the franchise agreement and any payout allocation schedules with your tax advisor.
2. Obtain a valuation for goodwill and client lists if any sale or monetization is contemplated.
3. Negotiate allocation of purchase price and document allocations on Form 8594 (asset deals) or related schedules for ownership sales.
4. Consider a Section 338 election if you are a buyer in a stock purchase and want basis step-up — discuss timing with counsel.
5. Document whether payments are for services or sale of intangible property; limit post-closing services if you seek capital treatment.
6. Coordinate state and (if applicable) cross-border tax positions early to avoid surprises.

When to call a tax attorney

Call a tax attorney experienced in M&A and franchising when any of the following apply:

• Large franchise conversion fees or cross-border conversions are involved.
• There is a sale or transfer of a book of business, client list, or noncompete payment.
• Ownership changes include investors, equity rollovers, or complex earn-outs.
• You need to negotiate a Section 338 election or plan for Section 197 amortization and state tax implications.

Final thoughts — 3 priority actions for 2026

1. Document everything: Signed allocation schedules, valuation reports, and clear agreements reduce audit risk and preserve tax positions. For practical documentation and resilience approaches see data-and-document resilience guidance.
2. Coordinate cross-disciplinary advice: Involve M&A counsel, a valuation expert, and a tax attorney early — especially when converting multiple offices or changing brands like REMAX, Royal LePage, or Century 21.
3. Plan for amortization timing: Section 197 amortization affects multiyear profitability and tax payments — integrate tax deductions into cash flow models and owner distributions.

Need tailored help?

If your brokerage is converting networks or you’re an agent negotiating a buyout, the right legal and tax structure can materially change your after-tax proceeds. In 2026, regulators and examiners are scrutinizing allocations and intangible treatment more than ever — don’t leave money or audit risk on the table.

Call us for a consultation: We specialize in franchise conversion tax planning for brokerages and agents, including valuation coordination, drafting defensible allocation schedules under Section 1060/8594, Section 338 planning, and noncompete structuring. Protect your value and control your tax outcome.

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