When you're selling a business that includes real estate and other components you want to structure the allocation of the purchase price among those various components so it's most advantageous for your 1031 exchange.
Mixed Bag of Properties
So in the sale of a mixed bag of properties - maybe you’ve got a hotel that is comprised of the dirt, and the brick, and mortar. But you also have the goodwill of the business, and the furniture fixtures, and equipment, and other items of personal property or chattel.
1031 works best for the exchange of real estate because real estate is broadly construed and lots of different properties can qualify for like-kind replacement property. Personal property, or chattel is much more restrictive. So if you had your druthers you would allocate heavily to the real estate and to a lesser degree to the goodwill in the personal property.
Goodwill for Goodwill
The reason for that is the goodwill in one business cannot be exchanged for the goodwill of another business. So you're going to have to pay your taxes on your gain from the goodwill. Furthermore, personal property is much more difficult to exchange. So you probably want to sell your chattel for whatever the book value is and be done with it.
The buyer of your property is going to want to allocate heavily to those items, but when you’re the seller you want to make sure that you’re driving the bus on the allocation from day one and getting your allocation so you can maximize the benefits of your 1031 exchange.
- 1031 Hotline: If you have questions about real property vs. personal property in a 1031 exchange, feel free to call me at 612-643-1031.
Defer the tax. Maximize your gain.
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