Can I defer capital gains taxes if I roll funds into a new deal?
August 20, 2024
by a searcher from University of California, Los Angeles in Orange County, CA, USA
I'm considering selling my online distribution business in order to use the funds to assist with the SBA down payment and working capital when I eventually close on a deal. The business would likely sell for around $350k. Is there a way to avoid/defer paying capital gains tax on this sale if I roll the funds into a new deal? That extra $100k would make a big difference as you could all imagine.
A few years ago, my understanding was that you could use the 1031 exchange for cases like this. Unfortunately, that rule now only applies to real estate from what I understand.
Any insight is greatly appreciated.
from The Johns Hopkins University in Gainesville, FL, USA
1. With $100k at risk, call a professional.
###-###-#### exchanges can be used to defer taxes from a business sale. The two gotchas that people run into are the time limit and the like-kind rule.
A 1031 exchange has a 180-day time limit that begins on the day the relinquished property is sold. Within that time frame, the exchange must be completed, or it will be considered invalid. The 180-day time limit includes:
45 days: The exchange participant has 45 days to identify potential replacement properties after the relinquished property closes. The exchange participant can name up to three replacement properties, but must close on one of them within the 180-day period.
180 days: The exchange participant has 180 days to acquire the replacement property.
The like-kind rule is why you need to talk to an accountant or tax attorney. The IRS states that "Properties are of like-kind if they're of the same nature or character, even if they differ in grade or quality." That's easy with real-estate, but it can be tricky for businesses. If you sell the assets of your existing business and then buy the existing stock to take ownership of your new company, is that a like-kind transaction?
from The University of Chicago in Chicago, IL, USA
2. An idea: Sell the business with taxable gain. No deferral. Use the cash before to buy the new business (before paying taxes). Structure the new business and time the new business to create losses to offset the gain from the current business. For example, buy the new business in November. You will have small income from that business. make sure the new business has fixed assets. Under TCJA you can write off the value of the "old" fixed assets in the year of acquisition. This write-off of old acquired fixed assets will create a paper loss that may allow you to offset the gain from the sale of the current business, and even the income from the current business for the year,