Are you a business owner about to sell your business but unsure of what to do with the profits? Maybe you’re looking down the road a few years at selling or possibly transitioning to the next generation. Regardless, you want to position yourself for a lifetime of financial freedom and stability. There is a reliable way to have both that isn’t subject to the fickle stock market.
When you sell or exit your business, you can:
- Maximize profitability by deferring capital gains taxes, possibly indefinitely.
- Enjoy financial stability without any responsibility.
- Collect effortless, escalating monthly income for 10–20 years.
Investment Opportunities for Business Owners Selling a Business or the Business and the Real Estate
As a business owner selling your company, there are three scenarios in which you might find yourself: selling the business only (not the real estate), selling the business and the real estate, or selling only the real estate and leasing it back as you work your exit plan or prepare to secede the business.
In all three scenarios, there are life-changing tax opportunities available that are unlike any other tax benefits. Rather than paying tens of thousands and even millions of dollars in capital gains tax on the profits from selling your business, you can maximize your profitability by using one or both of the following tax codes …
- The 1031 Exchange (available if you sell the company’s real estate)
- Opportunity Zones (available if you sell just the business or the company + real estate)
Both tax codes allow you to defer 100% of the capital gains tax and the depreciation recapture tax (an additional 25% savings), possibly indefinitely. But only if you reinvest in either an Opportunity Fund or like-kind real estate, which is any income-producing or investment property.
When you sell your company’s real estate and lease it back in a “sale-leaseback,” you can pull cash out of your business to purchase other income-producing commercial real estate (CRE) using the 1031 Exchange. Properties such as absolute triple net (NNN) lease investments are a great, no-maintenance option as they are responsibility free and typically provide guaranteed income for 10–20 years or more.
Let’s explore the 1031 Exchange and Opportunity Zones in greater detail.
Reinvesting Profits from the Sale of Business Real Estate: Use the 1031 Exchange to Defer 100% of the Federal Capital Gains Tax + Depreciation Recapture Tax
To maximize profits on the sale of your business real estate, you can utilize the 1031 Exchange. This defers 100% of the federal capital gains tax and the 25% depreciation recapture tax from the real estate portion of the sale.
The 1031 Exchange permits anybody selling a property used in a trade, for business, or as an investment, to swap that property for one or more like-kind properties, so long as the value does not exceed 200% of the value of the sold property and 100% of the profits from the sale are reinvested within 180 days.
Like-kind properties are any real estate that’s not your residential home or vacation home. Therefore, if you own your company’s building and the land, any other buildings and land associated with the business, or any vacant property associated with the business, you can sell it all and defer 100% of the federal capital gains tax and the 25% depreciation recapture tax (if you’ve taken depreciation in the past), as long as you buy more CRE.
Businesses and properties that can be used in a 1031 Exchange include:
- Manufacturing facilities
- Industrial facilities
- Agricultural and farmland
- Multitenant buildings and complexes
- Shops and service-based companies
- Vacant land
- Warehouses and mixed-use spaces
- Shopping malls and strip centers
- Gas stations and convenience stores
- Medical and dental clinics
- Pharmaceutical companies
- Any real estate used for business
When using the 1031 Exchange, all the money you save in capital gains tax and depreciation recapture tax goes back into the community and depending on the type of commercial real estate you purchase, can provide passive monthly income for decades, expanding your portfolio and building a nest egg for your heirs.
To learn the details of the 1031 Exchange, the IRS’s strict timeline, and how it applies to the sale of your business, be sure to read our blog: What is the 1031 Exchange Timeline?
Reinvesting Profits from the Sale of Business Real Estate in a Sale-Leaseback
When you sell your company’s real estate to a NNN lease investor and then lease it back in a sale-leaseback for 10–20 years, you can use a 1031 Exchange to defer taxes by reinvesting in like-kind commercial real estate.
This is a common investment tactic for business owners who are getting ready to exit. Using what would’ve been taxes paid on the profits — potentially millions — to reinvest into a diverse CRE portfolio, you can set yourself up for a lifetime of steady income that balances risk and reward and keeps its value, rather than fluctuating day-to-day.
There’s another exciting factor about this tax code — you can buy and sell using the 1031 Exchange repeatedly as there is no limit on how many times in your life you can utilize it. Effectively, you can build a real estate portfolio using the 1031 Exchange, increasing the number and value of your investments, and building wealth with tangible assets that carry numerous tax opportunities.
Reinvesting Profits from the Sale of the Business Only: Invest in a Qualified Opportunity Zone Before December 31, 2026
Aside from selling your business to employees and creating an ESOP to minimize your capital gains tax liability, you can completely eliminate paying it now and defer taxes by reinvesting the money from the sale of your business in a Qualified Opportunity Zone (QOZ).
The IRS defines the Opportunity Zone tax deferral as an economic development tool that allows people to invest in distressed areas in the United States. The purpose is to spur economic growth and job creation in low-income communities while providing tax benefits to investors.
This tax code allows you to use the profits from the sale of your business — not just the real estate like the 1031 Exchange — to qualify. Here, you can invest 100% of the profits into a Qualified Opportunity Zone Fund and after ten years, the federal capital gains and depreciation recapture taxes are eliminated rather than deferred. Using the QOZ program, you do not actually own a dollar store or drug store or any one tangible asset on your own, you are part of a fund or group that invests in properties in distressed areas.
If you’re thinking of selling your business but are not sure when, this tax program expires on December 31, 2026. Read the IRS’s facts about Opportunity Zones here.
Interested in an Opportunity Zone Fund? We have a nationwide network of reputable professionals to whom we can refer you as we do not sell these funds.
Tax Codes Help You Get into Real Estate Investing with a Higher Budget & No Experience: NNN Lease Properties
Many business owners are so used to stock market investing and contributing to retirement plans that they often don’t consider real estate as a business succession or retirement income option. Real estate has a bad reputation for being high-maintenance, unpredictable, and expensive, and the perception is that if you haven’t owned CRE in the past, you aren’t a candidate to start now. However, this is not the case with the triple net asset class.
NNNs are easy to own and basically expense-free. Absolute NNN lease investments don’t require any landlord responsibility, ongoing costs, or prior ownership experience — you simply purchase a property, collect rent, and live your life.
These single-tenant properties are typically leased by essential businesses owned by investment-grade corporations that agree to pay net taxes, net insurance, and net property maintenance, as well as rent, utilities, and most other expenses for up to 20 years. You’ll recognize them as major brands like Dollar General, Walgreens, Taco Bell, Starbucks, McDonald’s, 7-Eleven, Auto Zone, Caliber Collision, and Guidepost Montessori.
Since the tenant takes on all or most of the financial risk, and leases usually have built-in rent escalations as a hedge against inflation, you can own passive, lower-risk NNN properties anywhere, regardless of where you live, and reap the benefits of increasing income and tax opportunities.
Are NNN Lease Properties a Good Choice for the 1031 Exchange?
NNN lease properties are a great choice for the 1031 Exchange. Transactions are typically straightforward, which means they tend to close faster than more complex real estate deals with fewer surprises, and they tend to fit any budget, starting at around $1 million.
To determine if NNNs are the best way forward, it’s wise to engage a Westwood Net Lease Advisor before you sell your business. Our buyer advisors will work with you to determine your risk tolerance and financial goals, compile a property selection that fits those goals, and help you move forward with your 1031 Exchange and/or sale-leaseback transaction if that is what you want to do — all at no charge to you.
Bear in mind, once you close on the sale of your company, you only have 45 days from the moment of title transfer to provide the IRS with your chosen 1031 Exchange properties. If this deadline is missed by even a minute, you will wholly lose the benefit of deferring capital gains and depreciation recapture taxes.
Want to learn more about triple net lease investing? Be sure to download our free eBook or Audiobook: Your Comprehensive Guide to NNN Lease Investing to learn everything you need to know about triple net lease investing and the tax opportunities available to you.
To Wrap it Up — Reduce the Tax Impact on the Sale of Your Business with the 1031 Exchange, Opportunity Zone Tax Code & Sale-Leaseback
When you sell your business’s real estate and vacate or sell using a sale-leaseback, the 1031 Exchange is a smart way to save many thousands or even millions of dollars. You can defer 100% of the federal capital gains taxes on the profits, as well as depreciation recapture tax, while reaping the financial rewards of income-producing, easy-to-own, triple net lease properties.
If you sell just the business, you can utilize the Opportunity Zone tax program to defer those same taxes. Once you’ve invested for ten years, you eliminate capital gains and depreciation recapture taxes on the appreciation of the invested proceeds. Both tax benefits allow you to put those tax dollars to work for you, potentially indefinitely.
If you have any questions about the 1031 exchange and/or a possible sale-leaseback as you consider selling your business or succeeding to the next generation, please contact Westwood Net Lease Advisors right away. Since the timeline to utilize these tax codes is short, we’d like to help you put a plan in place and feel good about reinvesting in income-producing real estate. Our buyer representation is free. 314-997-5227