The short answer is yes. A 1031 exchange can be used to acquire a business. When buying a business, you as the buyer are responsible for paying local and state taxes that may have been owed by the seller. This includes but is not limited to employment tax, sales tax, etc. Any taxes owed to the IRS will also be your responsibility to pay off.
However, a 1031 exchange can enable you to defer all of those taxes so long as it is a like-kind investment. The difference is substantial. Capital gains and other taxes can account for up to 40% of the profit on the sale of property, done the regular way.
In this blog, we take a look at the various factors you need to consider when exchanging into a business:
Like-Kind Properties
As with a regular 1031 exchange, a business must be like-kind for it to qualify for tax deferral. This means it must be of equal or greater value than the original property. You can sell any type of property and exchange into a business such as multi-family property, an office building, or even a piece of land.
Practically any kind of investment property can be exchanged into a business – including multiple properties.
This applies to businesses across any industry segment or niche. For example, you can buy a mom-and-pop store or even a large retail chain with multiple outlets. It does not matter whether they are located in the same state or not. Thus, businesses can use a 1031 exchange to relocate to an entirely new market at a fraction of the cost.
How to exchange into a business via 1031 exchange
The process for buying a business is exactly the same as buying a property. Here’s a brief overview:
1) Hire a Qualified Intermediary (QI) before you initiate the sale of the original property
2) Make sure you’re clear about the exchange rules.
3) Find a buyer for your property and close the sale contract
4) Inform the buyer that you intend to complete a 1031 exchange and escrow the funds with the QI
5) Identify the replacement property (business, in this case) within 45 days of the sale
6) Close the sale agreement for the relinquished property
7) Acquire the business with the QI acting as the interim titleholder
8) Close the purchase agreement for the business and acquire title
Last Words
Buying a business can be an expensive affair. As the new owner, you would be responsible for any outstanding debt on the books of the company. Add taxes to the equation and the cost can go up significantly. A well-structured 1031 exchange can enable you to defer taxes and get better returns on your investment.
Need help buying a business with a 1031 exchange? Contact us today!
