Can I 1031 Exchange One Business for Another?

1031 exchange one business for another

Many taxpayers are entrepreneurial. They might be in one business segment and want to 1031 exchange into a new business segment. For example, a restaurant owner might want to sell their restaurant and buy a hotel. How can this be an exchange? Isn’t a restaurant fundamentally different than a hotel?

Real Estate

In the realm of 1031 pretty much all real estate is considered like-kind. So if we’re dealing with only the real estate, it’s really easy to do an exchange from a restaurant building to a hotel building. As long as they’re both in the US and used for investment or business purposes, they’re like-kind.

Other Elements or Components

Other types of assets (other than real property) that may be involved in the sale, like the restaurant equipment or hotel furnishings – those types of property are not as easy to exchange in a 1031. This is because the like-kind standard is more stringent and restrictive for personal property or chattels. I often tell my clients who want to do business equipment exchanges to bulk up the value in their asset purchase agreement to specify that the real estate is the primary component that’s being sold. Any fixtures, furniture, equipment, etc. is just being sold at a book value or a nominal amount. Sell the beds and the stoves for a dollar. It’s the real estate that we want to bulk the value on because that’s the asset that’s most readily exchanged.

The buyer of your relinquished property may have a different allocation of value because they want to depreciate those items more rapidly. But you’re going to have to rein them in and insist on your allocation to maximize your 1031 exchange of like-kind property.

  • 1031 Hotline: If you have questions about exchanging one business for another, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.


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