1031 Exchange for A Business?

Business owners often ask us, and the answer is Yes, a 1031 exchange for a business is possible.  The reason business owners ask if it is possible, is they often want to exchange a business for an investment property.

But, they are very rare to pull off for many reasons.  However, the exchange must be like kind, so business assets can not be exchanged for an Industrial property, or any other real property for that matter.

1031 Exchange For Business Assets

Businesses are comprised of intangible and tangible assets. Intangible assets are things such as Goodwill, Trade Name, Non Compete Covenant, Intellectual Property etc. Tangible assets are physical items (hard assets) such as Equipment & Machinery, and are known as Personal Property and Chattel Real. The only items that are exchangeable are the hard assets, the chattel real.

For example, a manufacturing business sells for $1,000,000 which is allocated as the following $500,000 for the Equipment (FF&E) and the other $500,000 to Goodwill and other intangible assets such as customer list, trade name, non compete covenant etc.

Since most business owners are ready to take their lives in another direction when they sell their business, they would like to trade for an investment property and not more business assets, business 1031 are rare.

According to Earl M. Salter, E.A., of Pacific Financial Exchange Corporation only the $500,000 allocated to the FF&E is even eligible to be exchanged. Thus, unless it is a business heavy in tangible assets, there is very little to exchange. Even when there are assets that are exchangeable, there just is not enough demand from other businesses wanting to exchange. If you want to do a business exchange, you will need to identify potential exchange partners.

One way to go about finding an exchange partner is to network within your industry. Obviously, this is a tricky thing, as you don’t want everybody in the industry to know what you are up to. So another option is to use an Accommodator. Accommodators are third party intermediaries who facilitate 1031 exchanges. With the help of an accommodator, it may be even possible to pull off a three party exchange.

For More information on how Just Elementary, Inc, Commercial brokers can help you with developing and exit strategy, email cs@justelementary.com or call (323) 213-9193