Yes, if your business sale includes real estate held for investment or business use (not personal use), you can use a Section 1031 like-kind exchange to defer capital gains tax on the real estate portion by reinvesting in replacement real estate. Critical rules: identify replacement property within 45 days of sale; close on replacement property within 180 days; use a qualified intermediary to hold proceeds; only real property qualifies post-2018 (not equipment or other business assets).
Section 1031 was significantly narrowed by the 2017 Tax Cuts and Jobs Act, it now applies only to real property used in a trade or business or held for investment. Equipment, vehicles, intellectual property, and other personal property no longer qualify. For business sellers whose transaction includes a building or land, this still leaves a meaningful tax deferral opportunity on the real estate component of the sale.
The mechanics: at closing, the real estate sale proceeds must be transferred to a Qualified Intermediary (QI), not received by the seller. The seller has 45 days from closing to identify potential replacement properties (in writing, with specific identification rules) and 180 days from closing to close on the purchase of one or more replacement properties. The replacement property must be of equal or greater value, must be held for investment or business use, and must be financed with the original sale proceeds.
Common replacement strategies for retiring business owners: a Delaware Statutory Trust (DST), a passive real estate investment that allows fractional ownership of institutional-quality properties; a Tenant-in-Common (TIC) interest in a single larger property; or direct purchase of triple-net-lease commercial real estate (often single-tenant retail, medical office, or industrial). Each has trade-offs in terms of management burden, diversification, and exit liquidity.
When a 1031 exchange does NOT make sense: if the seller wants liquid investments, not real estate; if the goal is to consolidate net worth into liquid retirement assets; if the deferred gain is small relative to the headache of identifying and closing on replacement property; or if the seller intends to gift the property within their lifetime (the gain isn't eliminated, just deferred, though held until death, the step-up in basis eliminates the deferred gain entirely).
Key facts
- Section 1031 (post-2018): applies only to real property held for investment or business use
- Identification window: 45 days from closing to identify replacement property in writing
- Closing window: 180 days from closing to close on replacement property purchase
- Qualified Intermediary required: seller can't receive sale proceeds directly
- Replacement property must be: equal or greater value; held for investment or trade/business use
- Step-up at death: deferred gains are permanently eliminated when heirs receive the property at stepped-up basis
What is a Delaware Statutory Trust (DST) and is it good for retiring business owners?
A DST is a passive real estate investment vehicle that holds institutional-quality real estate (often Class A office, multi-family apartments, industrial, or net-lease retail). Investors purchase fractional beneficial interests, receive monthly distributions, and have no management responsibility. DSTs qualify as 1031 replacement property and are popular with retiring business owners who want to defer capital gains but don't want to be active landlords. Trade-offs: limited liquidity (typical 5-10 year hold periods), no decision-making authority, sponsor fees, and concentration risk in single properties. Best used as part of a diversified post-sale portfolio, not the entire post-sale strategy.
Can I do a 1031 exchange on the goodwill or business assets when selling my business?
No. Post-2018, Section 1031 applies only to real property. Goodwill, customer relationships, intellectual property, equipment, vehicles, inventory, and other business assets can't be 1031 exchanged. The capital gain on these items is taxable in the year of sale. For business sellers whose transaction includes both real estate and operating business, the typical structure separates the two: the real estate component qualifies for 1031 deferral; the operating business sale is taxable in the year of sale.
