An owner sells the restaurant. One buyer, one price, one closing, and in her mind one transaction.
The tax code sees three. It sees the building and land. It sees the equipment, furniture, and fixtures. And it sees the goodwill, the value of the name, the customer base, the fact that the place is busy on a Tuesday.
Only the first of those can go into a 1031 exchange. The other two are taxable, and the number attached to each is decided by an allocation that is frequently written into the contract without much thought.
This applies to any owner-operated property: hotels, restaurants, marinas, self-storage, car washes, medical and dental practices, funeral homes. Wherever a business and its real estate sell together, this is the conversation.
What changed in 2017, and what it means now
Before the Tax Cuts and Jobs Act, personal property could sometimes be exchanged for like-kind personal property. That door is closed. For exchanges completed after December 31, 2017, Section 1031 applies to real property only.
The final regulations define real property as land and generally anything permanently built on or attached to it, and they also respect state or local law characterization. That last point matters more than it sounds, because it is often what decides whether a particular fixture travels with the building or with the equipment list.
Everything else falls outside: equipment, vehicles, inventory, furniture, and all intangibles.
Goodwill is the hard stop
Of the three buckets, goodwill is the least negotiable. Goodwill has never been like-kind to other goodwill, and it cannot be exchanged under any structure. Where a business sells for meaningfully more than the sum of its tangible parts, that premium is goodwill, and it is simply taxable.
For a profitable operating business, this can be the largest slice of the price. An owner expecting to defer tax on the whole sale is in for an unpleasant surprise, and the surprise usually arrives at tax time rather than at closing.
| What sold | Qualifies for 1031? | Typical treatment |
|---|---|---|
| Land and building | Yes | Deferred, if the exchange is structured properly |
| Permanently attached improvements | Usually yes | Follows the real property, subject to state law |
| Equipment, FF&E, vehicles | No | Taxable; may trigger recapture |
| Inventory | No | Taxable |
| Goodwill and intangibles | No, never | Taxable, often the largest slice |
The allocation is a negotiation, and both sides care
Here is where owners give away money without noticing. The purchase price has to be split among these categories, and that split goes in the contract.
Your interests and the buyer's are not aligned. You generally want more value allocated to real property, because that portion can be deferred. The buyer often prefers more allocated to equipment and other short-lived assets, because those depreciate far faster than a building.
That tension is normal and negotiable. What is not acceptable is an allocation invented at the closing table, or one that cannot be supported. The allocation should be defensible, ideally grounded in an appraisal or a reasoned valuation, because it is exactly the kind of number that gets examined later. Aggressive allocation toward real property to maximize deferral is not a free option; it has to reflect reality.
What to do before the business is listed
- Get the real estate valued separately. You cannot negotiate an allocation intelligently without knowing what the building alone is worth.
- Inventory what is genuinely a fixture. Items permanently attached often travel with the real property. Items that unbolt usually do not. State law frequently decides the close calls.
- Model the tax on the non-qualifying portion. Equipment can carry its own depreciation recapture, and that liability lands whether or not the real estate exchanges cleanly.
- Decide whether an exchange is still worth it. If the real property is a modest share of the price, the deferral may not justify the complexity, which is the same honest calculation we make in when not to do an exchange.
- Put the allocation in the contract deliberately, alongside the cooperation clause, rather than leaving it to whoever drafts last.
Business sales with real estate are among the more technical exchanges we see, and the allocation is a valuation and tax question rather than a rule of thumb. Your CPA, and often a qualified appraiser, determine the defensible split for your transaction. What we can do is make sure the question is asked while the price is still being negotiated, which is when the answer is still worth something, and that is where our exchange process begins.
Common questions about selling a business with real estate
Can I 1031 exchange my whole business sale?
No. Since 2017 only the real property portion qualifies. Equipment, inventory, and goodwill are taxable regardless of how the deal is structured.
Can goodwill be exchanged?
No. Goodwill is not like-kind to other goodwill and cannot be exchanged. Where a business sells above the value of its tangible assets, that premium is generally taxable.
Who decides the allocation between real estate and everything else?
The parties negotiate it and it goes in the contract, but it must be defensible. An appraisal or reasoned valuation supports it, and your CPA should be involved before the number is fixed.
Why would the buyer care about the allocation?
Buyers often prefer more value allocated to equipment because it depreciates much faster than a building. Your preference usually runs the other way, which is why it is negotiated.
Does equipment trigger its own tax?
It can. Personal property sold at a gain may carry depreciation recapture, which is taxable in the year of sale and separate from the real property analysis.