As a 1031 exchange intermediary, we are often asked if an operating business can be exchanged under Section 1031 of the Internal Revenue Code. The answer is yes, it is possible to exchange an operating business for another qualifying property under Section 1031.
However, there are certain requirements that must be met in order for the exchange to qualify for tax deferral. First, both the relinquished property (the operating business) and the replacement property must be held for investment or for productive use in a trade or business. This means that the property cannot be held for personal use, such as a vacation home or a second home.
In addition, the operating business must be exchanged for like-kind property. Like-kind property is defined as property that is of the same nature, character, or class. For example, a restaurant could be exchanged for another restaurant or a rental property could be exchanged for another rental property.
It is also important to note that the value of the replacement property must be equal to or greater than the value of the relinquished property in order to defer all taxes. If the value of the replacement property is less, there may be some taxes due on the difference.
Overall, it is possible to exchange an operating business under Section 1031, but it is important to work with a qualified intermediary and ensure that all of the requirements are met in order to qualify for tax deferral. At 1031 Exchange Place, we are here to assist you with your 1031 exchange needs and provide guidance throughout the entire process.