In my conversations with business owners who own the property where they operate, is a common comment that goes something like this:
“The building where I run my business doesn’t qualify for a 1031 exchange, because it isn’t considered an investment property.”
Not only is that incorrect—it can cost an owner hundreds of thousands, if not millions, in unnecessary taxes if they believe it.
Why the Myth Exists in the First Place
So why does this misunderstanding linger? It comes down to language. The IRS rules clearly state that property qualifies if it is “held for business, trade, or investment.” But most people only latch onto the phrase “investment property.” That shorthand creates the impression that unless you’re a landlord collecting rent from unrelated tenants, you’re out of luck.
In reality, a property you use in your own trade or business is just as eligible as a rental property down the street. The building you own and operate from is not disqualified simply because it also houses your business. It still meets the standard—it’s real property held for productive use in your trade or business. That’s why so many business owners who only hear the term “investment property” end up mistakenly believing they can’t take advantage of a 1031 exchange when they sell.
The Business vs. the Real Estate
Here’s where the confusion usually starts. When someone owns a business, the business itself—goodwill, equipment, accounts receivable, customer lists—does not qualify for a 1031 exchange. That’s personal property, and the IRS doesn’t allow exchanges of operating businesses.
But the real estate the business sits on is another story entirely. If you own the property that houses your company—whether it’s an office building, a retail storefront, an industrial warehouse, or even a piece of land—it qualifies as investment property for 1031 purposes. Why? Because it is real property held for productive use in a trade or business, or for investment. The IRS draws a hard line between the business and the dirt it sits on.
A Real-World Example
Let’s take a business owner who has operated from the same industrial building for the last 25 years. They own the real estate through a separate LLC, (which is how it should be done) and their operating company pays rent to that LLC. When it comes time to retire or sell the business, they might sell their operating company one way and their real estate another.
If they sell the real estate outright without a 1031 exchange, the tax bill on the gain can be massive. But by structuring a 1031 exchange, they can defer the capital gains taxes and roll those proceeds into a different type of property, maybe one that provides passive income with no management, regardless, the key is that the property is treated as an investment, not as part of the operating business.
Why This Matters for Business Owners
Think about it: for many business owners, the real estate is one of the most valuable assets they’ll ever own. Too many times, I’ve seen people treat the sale of their building as an afterthought compared to the sale of their business. But when you consider the potential tax deferral of a 1031 exchange, the building can become the cornerstone of their retirement strategy.
By planning ahead, a business owner can:
- Sell their operating company to a buyer without giving up their real estate.
- Structure a lease so the new owner of the business becomes a tenant.
- Eventually sell the building itself and exchange into more passive investments.
It’s not unusual for this strategy to provide reliable income for decades—all without taking the immediate tax hit that comes from selling outright.
The Importance of Planning
Here’s the truth: the 1031 exchange clock doesn’t care if you’re a seasoned real estate investor or a first-time seller of your own business property. Once you close, you’ve got 45 days to identify and 180 days to close on your replacement. That’s why it’s critical to start the planning process early.
Business owners who understand this can avoid scrambling in the middle of a transaction. They’ll already have their options lined up. They’ll know if a, a NNN leased asset, or a DST, or some other asset class, is the best fit for their long-term needs.
The Bottom Line
Owning the property your business operates from is one of the smartest wealth-building moves you can make. When it comes time to exit and transition, a strategic succession plan that includes ownership structure, followed by using the power of the 013 exchange, can make the difference between a tremendous tax payment or a significant head start in building generational wealth. Whether you’re selling the business, retiring, or simply wanting a more passive income stream—that property absolutely qualifies for a 1031 exchange.
Your business property is your ticket to preserving capital, setting yourself up for the next phase of your financial journey and building generational wealth.
If you’re a business owner who’s been sitting on your property for years, don’t leave money on the table. Your building qualifies. The opportunity is there. It’s up to you to take advantage of it.
We Are Here to Help!
If you are an investment property owner, schedule a no-obligation strategy call with me at www.Best1031Online.com, or contact James Bean
of SVN-Rich Investment Real Estate Partners, CA DRE# 01970580, at 805-779-1031
or email at [email protected].
If you are an agent/broker, I am happy to discuss strategies with you on how to best serve your next listing client in preparing them for a successful exchange. Please visit the site and click on the Agent’s button located at the top right-hand corner of the Home Page!
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All information is deemed to be accurate and is not tax or legal advice. All investors/taxpayers should consult their CPA, tax attorney, and investment advisors.