Selling a Business: The 1031 Exchange Dilemma
13 July 2026
For many business owners, selling a business represents the largest financial transaction of their lives. After spending decades building a successful company, it’s natural to focus on negotiating the highest possible sale price. Unfortunately, many owners don’t begin thinking seriously about taxes until after they’ve accepted an offer—and by then, many of their planning opportunities have disappeared.
Consider the case of a 64-year-old independent restaurant owner who spent 25 years building a thriving business. He recently accepted a $1.2 million cash offer that included both the restaurant operation and the building where it operates. With closing only a few weeks away, he assumed a Section 1031 exchange would allow him to defer most, if not all, of the taxes from the sale.
A closer review of the tax rules revealed an unpleasant surprise.
The Hidden Tax Problem
Many business owners mistakenly believe that a 1031 exchange applies to the entire sale of a business. It doesn’t.
Since changes made under the Tax Cuts and Jobs Act of 2017, Section 1031 applies only to real property. While the building itself may qualify for like-kind exchange treatment, the operating business does not.
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That means valuable business assets such as:
- Goodwill
- Furniture, fixtures, and equipment
- Liquor licenses
- Trade names
- Customer relationships
- Other intangible assets are all generally taxable when sold.
This distinction catches many owners off guard because they view the business as one asset when, from a tax standpoint, it is actually several different assets being sold at the same time.
One Sale, Two Transactions
In this example, the $1.2 million purchase price is effectively divided into two separate transactions.
A reasonable allocation might assign approximately $700,000 to the real estate and $500,000 to the operating business.
The real estate portion produces an estimated gain that may qualify for a 1031 exchange, allowing taxes on that portion to be deferred if the owner purchases qualifying replacement property.
Our video, on how the value of a business’ assets might add to the value of a business, is available HERE on our YouTube channel.
The business assets are another story.
The gain associated with goodwill, equipment, and other operating assets generally remains taxable. In many cases, depreciation taken on equipment over the years must be “recaptured,” meaning a portion of that gain is taxed as ordinary income rather than at the more favorable long-term capital gains rates.
The result can be a substantial tax bill, even when part of the transaction qualifies for a 1031 exchange.
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Why Timing Matters
In this case, the seller had owned the restaurant for 25 years. His investment in the business and real estate was relatively modest compared to the sale price, creating significant taxable gains.
His CPA estimated that without additional planning, combined federal and state taxes on the business portion alone could easily reach between $120,000 and $150,000.
Unfortunately, by the time an offer has been accepted and closing is only weeks away, many of the more sophisticated tax planning strategies are no longer practical.
The lesson isn’t that taxes are unavoidable. It’s that tax planning works best before the business is on the market—not after a purchase agreement has already been signed.
The Real Lesson
The biggest takeaway isn’t about Section 1031 exchanges. It’s about preparation.
Too many owners spend decades building valuable businesses but devote very little time to preparing for the tax consequences of selling them.
A business sale is rarely just one asset changing hands. It often includes real estate, equipment, inventory, intellectual property, goodwill, licenses, contracts, and other assets—each with its own tax treatment.
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Understanding how those assets will be allocated, and how each will be taxed, should be part of the planning process long before a buyer appears.
The earlier these discussions begin, the more options are typically available.
The Bottom Line
Selling a business is about much more than finding a buyer and agreeing on a price. The structure of the transaction can have a significant impact on how much money ultimately ends up in the seller’s pocket.
Working with experienced business brokers, accountants, tax advisors, and attorneys before taking the business to market allows owners to evaluate their options, understand potential tax exposure, and avoid unpleasant surprises at closing.
After all, the goal isn’t simply to sell your business for the highest price. It’s to maximize what you keep after the sale is complete.
Proper planning won’t eliminate every tax bill—but it can help ensure that years of hard work produce the retirement you’ve earned.
“If you can’t feed a team with two pizzas, it’s too large.”
– Jeff Bezos, Founder of Amazon
If you have any questions or comments on this topic – or any topic related to business – I’d like to hear from you. Put them in the comments box below. Start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.
I’ll be back with you again next Monday. In the meantime, I hope you have a safe and profitable week.
Joe
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The author is the founder of Worldwide Business Brokers and holds a certification from the International Business Brokers Association (IBBA) as a Certified Business Intermediary (CBI) of which there are fewer than 1,000 in the world. He can be reached at
