Short answer: Only partly. When you sell a business, you can do a 1031 exchange on the real estate the business owns, such as its building and land. Goodwill, equipment, vehicles, inventory and non-compete payments don't qualify, so gain on those is taxed in the year of sale. A stock sale of the company doesn't qualify at all.
Reviewed by Jon Hilley. Last updated September 29, 2026.
Partly. Under current 1031 exchange rules, only real property qualifies, so when you sell a business you can exchange only the real estate that goes with it: the building, land or other real property the business owned. Goodwill, equipment, vehicles, inventory, customer lists and covenants not to compete haven't qualified since the end of 2017.
A business sale is really a sale of many assets bundled together. The buyer and seller allocate the price among them, and each piece is taxed under its own rules. The real estate piece can go into a 1031 exchange; everything else is taxed in the year of sale.
Key rules
- Real property only: since the Tax Cuts and Jobs Act, exchanges completed after 2017 are limited to real property (IRC §1031(a)(1); Pub. L. 115-97).
- Business-use real estate qualifies: property held for productive use in a trade or business is eligible, not just investment property (IRC §1031(a)(1)).
- Price allocation: buyer and seller allocate the purchase price among asset classes and report it on Form 8594 (IRC §1060).
- Personal property components: items split out as §1245 property, such as equipment and fixtures, don't qualify and can trigger ordinary recapture (IRC §1245(b)(4)).
- Same taxpayer: the entity that owns and sells the real estate must be the one that buys the replacement (IRC §1031(a)(1)).
Asset sale vs. stock sale: which allows a 1031 exchange?
If the buyer buys the assets of your business, the real estate is one of the assets sold, and that portion can be exchanged. If the buyer buys the stock of your corporation or your LLC membership interests, no 1031 exchange is available at all: stock and partnership interests aren't real property, and the corporation or LLC still owns the building afterward.
Many owners hold their building in a separate LLC and lease it to the operating company. That setup makes things easier: the real estate LLC can sell the building to the buyer in its own transaction (with its own exchange), or keep it and lease it to the new owner.
If your business leases its space
If the business rents its space instead of owning it, there is usually no real estate to exchange. The exception is a long-term lease: a leasehold with 30 years or more to run is treated as like-kind to real estate you own (Treas. Reg. §1.1031(a)-1(c)), so ask your CPA whether yours qualifies.
How the price allocation affects your exchange
The amount allocated to the real estate is what you can exchange. Buyers often prefer more value on equipment (faster depreciation) and less on the building, and sellers who want to exchange often prefer the opposite. The allocation should be negotiated in the purchase agreement and reflect fair market value.
Watch the fixtures. If you took cost segregation deductions on carpets, lighting or other components, those are personal property now, and gain on them can be taxed as ordinary income even if the building itself is exchanged. Model this with your CPA before you sign.
Example: selling a manufacturing business
- Total sale price (no mortgage on the real estate): $3,000,000
- Allocated to building and land: $1,800,000 (adjusted basis $900,000, after $400,000 of depreciation)
- Allocated to equipment: $400,000 (adjusted basis $100,000; the $300,000 difference is all prior depreciation)
- Allocated to goodwill: $800,000 (adjusted basis $0)
- Real estate gain, eligible for 1031: $900,000
- Equipment gain, taxable as ordinary income under §1245: $300,000
- Goodwill gain, taxable: $800,000
The total gain is $2,000,000, but only the $900,000 on the real estate can be deferred, by reinvesting at least the $1,800,000 real estate proceeds in replacement property through a qualified intermediary. Assuming 25% on the $400,000 depreciation portion ($100,000) and 15% on the other $500,000 ($75,000), the exchange defers $175,000 of federal tax. The $1,100,000 of equipment and goodwill gain is taxed in the year of sale. Selling costs, net investment income tax (which may not apply to a business you actively run) and state tax are not included.
Other questions investors ask
How do you avoid paying capital gains on a business sale?
You usually can't avoid all of it, but you can reduce or delay it. A 1031 exchange defers the gain on the real estate. An installment sale can spread the rest over the years you are paid, though depreciation recapture is taxed in the year of sale (IRC §453(i)), and some owners of qualifying C corporation stock can exclude gain under IRC §1202. Plan the structure before you sign a letter of intent.
Common mistakes
- Agreeing to a stock sale without modeling the real estate. We see owners accept a stock deal and then learn the building can't be exchanged. Carve the real estate out first if you want to exchange it.
- Letting the buyer set the allocation. A low building value in the purchase agreement shrinks what you can defer.
- Calling us after closing. The QI has to be in place before the real estate closes and receive those proceeds directly. Once the funds hit your account, the real estate portion is taxable.
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