If your business owns investment property—and you're considering selling—it’s worth asking one key question: what will you do with the capital gains?
Rather than taking the tax hit now, a 1031 Exchange allows you to defer capital gains taxes by reinvesting proceeds into another qualifying property. It’s one of the smartest strategies for entrepreneurs looking to scale real estate holdings without triggering a major tax bill.
Let’s walk through how it works, what to watch out for, and why timing is everything.
What Is a 1031 Exchange?
A 1031 Exchange—also known as a like-kind exchange—lets you sell one investment property and reinvest the proceeds into another property of equal or greater value without paying capital gains taxes on the sale.
It’s a tax deferral strategy, not a tax elimination one. But done right, it keeps more money in play for the next investment—and positions you for long-term growth.
How It Works
To qualify for a 1031 Exchange, your transaction needs to meet three core requirements:
- Like-Kind Properties
The properties must be similar in use or character—think commercial for commercial, or rental for rental. “Like-kind” is interpreted broadly by the IRS, giving you flexibility. - Qualified Intermediary
You can’t touch the funds from the sale. A qualified intermediary (QI) holds the proceeds and handles the exchange to keep you in compliance. - Strict Timelines
You have 45 days from the sale of the original property to identify potential replacements and 180 days to close. Miss those windows, and the deferral is lost.
Why It Matters for Business Owners
A 1031 Exchange offers major upside when used strategically:
Defer Capital Gains Taxes
Reinvesting 100% of sale proceeds means more capital for the next deal—and no immediate tax bill.
Expand or Diversify Your Portfolio
Move into higher-value or better-performing properties without eroding returns through taxes.
Support Business Growth
Use real estate investments to strengthen your business’s balance sheet or secure new income streams.
That said, partial reinvestments—like taking some cash out or reducing debt—can trigger “boot,” which may be partially taxable. Full reinvestment is key to maximizing the benefit.
When It Makes Sense
This strategy is especially relevant if you’re:
- Selling a property that’s appreciated significantly
- Looking to consolidate or upgrade investment real estate
- Planning to reinvest in assets that better serve your current business goals
- Wanting to avoid a large capital gains tax hit this year
Just don’t wait until the last minute—the 45-day clock starts ticking fast once your property sells.
Thinking about selling business property?
Schedule a consultation with Nth Degree today to find out if a 1031 Exchange is the right move for your business, and how to structure it for maximum benefit.
