Can I do a 1031 on a Building that my Business Leases?

business 1031 exchange

Many people want to expand their business and they want to buy a like-kind replacement property that they will eventually rent to their own business. Is this allowed under section 1031?

Business 1031 Example

Let’s look at an example. Say you have taxpayer A forming an LLC, and the LLC buys the replacement property. Then the LLC enters into a lease with the taxpayer’s separate operating company - the business that the taxpayer operates for their livelihood. It might be a metal fabricating business or some kind of light manufacturing business. There are many tax and legal advantages of owning your real property in a separate entity and then renting it to your operating company; because the rental payments may be received as passive income, and you are protecting yourself from predatory creditors by compartmentalizing your assets into different business entities.

That is a great way for taxpayers to grow and expand their businesses to effectively be their own landlord. Since they're holding the replacement property for investment or business purposes for rent to their own business, that qualifies under Section 1031. In fact I'd argue that was what Congress intended when they thought up section 1031 - to stimulate economic growth and to allow people to move Capital to the most advantageous investment, in this case the new location of their own company and hopefully allow them to expand their net worth.

  • 1031 Hotline: If you have questions about 1031s and business leases, feel free to call me at 612-643-1031.

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