You’ve put in the work. After years—maybe decades—of building and growing your business, the sale is nearing completion. You’re ready for your next chapter, whether that means retirement, new ventures, or simply more time for yourself and your family. But as you prepare to close the deal, there’s one detail that may be catching your attention for the first time: the tax bill.
If your business includes highly appreciated real estate, the taxes on that portion of the sale could be significant, potentially consuming more than 30% of your proceeds when you factor in federal capital gains taxes, state taxes, depreciation recapture, and the 3.8% Net Investment Income Tax. Without proper planning, a substantial share of your hard-earned equity could go straight to the IRS.
Real Estate—Not the Business—May Qualify for Tax Deferral
While the operating business itself doesn’t qualify for tax deferral under Section 1031 of the Internal Revenue Code, the real estate used in your business might. Real property held for productive use in a trade or business or for investment purposes is often eligible for a 1031 exchange, a strategy that allows you to defer capital gains taxes by reinvesting proceeds into another qualifying property.
That means if you own any of the following, you may be able to defer taxes on their sale:
- - Warehouses or distribution centers
- - Office buildings or showrooms
- - Manufacturing facilities
- - Retail property
- - Land held for business use or development
Understanding this distinction can make a major difference in preserving the wealth you've built. And for business owners no longer interested in managing new properties, there’s a little-known but highly effective option: the Delaware Statutory Trust (DST).
The DST: A Passive Alternative for 1031 Exchange Investors
A DST is a legal trust structure that enables multiple investors to co-own institutional-grade real estate. It’s recognized by the IRS as a “like-kind” property for 1031 exchange purposes, meaning you can reinvest your real estate sale proceeds into a DST and receive the same tax deferral benefit as if you had purchased a new property directly.
But with a DST, you aren’t taking on the responsibilities of being a landlord. The properties are professionally managed, and your ownership is completely passive.
Typical DST properties include:
- - Multifamily apartment communities
- - Industrial distribution centers
- - Medical office buildings
- - Grocery-anchored retail centers
- - Corporate headquarters leased to creditworthy tenants
Why DSTs Appeal to Business Owners
If you're ready to move on from hands-on management but still want reliable income and tax deferral, a DST may offer a compelling solution. Benefits include:
Passive Income Potential – Many DSTs provide the possibility for monthly or quarterly distributions from rental income, without requiring any landlord responsibilities.
Diversification – Unlike owning a single building, DSTs offer exposure to multiple properties, sectors, and geographic regions through a single transaction.
Lower Minimums – With minimum investments as low as $100,000, DSTs make it easier to reinvest leftover equity or diversify among several offerings.
Fast Turnaround – Because DST offerings are pre-structured and often available from inventory, they can be identified and closed quickly to meet IRS deadlines.
Compliance Made Simple – Sponsors handle leasing, repairs, and property-level operations, helping ensure your investment remains passive and tax-advantaged.
Avoiding Common Mistakes
Business owners navigating a 1031 exchange for the first time often run into avoidable pitfalls. Here are a few to be aware of:
Waiting Too Long to Plan – The IRS allows just 45 days to identify replacement properties and 180 days to close. DSTs can speed this up—but only if you start early.
Not Using a Qualified Intermediary (QI) – You’re not allowed to receive the sale proceeds directly. A QI must handle the exchange to keep it compliant.
Assuming You’re Ineligible – Many owners mistakenly think a business sale can’t benefit from a 1031 exchange. But it’s the real estate, not the operating entity, that counts.
How FGG1031 Can Help
At FGG1031, we specialize in helping business owners like you strive to preserve more of what you’ve built. If you’re preparing to sell business-use real estate, our team can walk you through the 1031 exchange process, introduce suitable DST options, coordinate with reputable Qualified Intermediaries, and support your goals with a custom tax-deferral strategy.
You’ve worked hard to build your business. Now it’s time to ensure your next move works just as hard for you.
Schedule a no-obligation consultation today to explore your 1031 options with FGG1031.
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