When you’re selling a business that also owns real estate, there’s a strategic opportunity to defer capital gains taxes through a 1031 exchange—but only on the real estate portion of the sale. Business-related assets like equipment, inventory, and goodwill aren’t eligible, so it’s essential to separate the property from the rest of the business in the sales contract.
Key Considerations for Real Estate Professionals:
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Only Real Property Qualifies: The 1031 exchange applies strictly to real estate held for investment or business purposes. Personal-use property doesn’t qualify. The replacement property must also be used for investment or business operations.
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Separate and Allocate Values: Clearly distinguish the value of the real estate from the business assets in the sale agreement. This distinction ensures accurate tax reporting and allows the real estate to qualify for the 1031 exchange.
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Entity Structure Matters: If the property is held in a partnership or entity (like an LLC), coordination among all partners is crucial. Disagreements—such as one partner wanting to cash out while others want to exchange—can complicate the process.
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Tax Treatment Varies: Real estate gains may qualify for tax deferral, but other assets could be taxed as ordinary income or capital gains. A CPA or tax professional should handle the valuation and allocation to ensure the transaction is tax-efficient.
Final Thoughts
Selling a business with real estate offers a smart path for reinvestment using a 1031 exchange—but only if the deal is properly structured. Work closely with a qualified intermediary and a tax advisor to ensure compliance and maximize the financial benefits.
Always consult a licensed attorney or tax advisor before proceeding.