As a small business owner, you own your building and pay rent to yourself. But if your building becomes too small and you need to find a larger space, what should you do?

Section 1031 of the Internal Revenue Code allows a business owner to sell a building, acquire a new and larger building, and postpone payment of capital gains tax. However, there are tricky rules for this kind of transaction, and strict time frames are imposed.

Once you find a buyer for your building, you will set a closing date. Typically, the buyer will take about three months to acquire financing and actually close title. Once you give a deed to the property, you will have 45 days to identify a replacement property. You will have 180 days from the date of the sale of your smaller building to actually close title on the larger building.

Most importantly, you cannot take any money from the closing table. You must deposit the net sales proceeds with a Qualified Intermediary. This Qualified Intermediary will hold the funds until you actually close title on the new building.

The law says that you can postpone payment of any capital gain until you sell the new building sometime in the future. It may be that you will own the second building at the time of your death.

The point is that you will take away 100% of the net proceeds of sale to invest in the new property and you will pay no capital gain tax.

RTTP represented an individual whose building had depreciated to a zero balance. There was a capital gain of about $250,000.00 at the time of the sale of his business. However, we were able to structure the transaction so that no capital gain tax was paid. The client was able to have a new building built to his specifications. Once the building was completed and the Certificate of Occupancy issued, our client was able to vacate the smaller building (which had been rented to another company in the interim and was to be sold to that company at the end of the interim period) and was able to obtain Industrial Development Association financing for the acquisition of the new property.

In the process, RPPT saved the client about $70,000.00 in capital gain taxes. If the client still owns the building at the time of his death, that building will be stepped up to the date of death value. If the Federal estate tax exemption remains at $5,000,000.00, it is unlikely that there will be any estate tax on the value of the building at the death of the owner. Any capital gain tax to be paid will evaporate.

If you have a similar situation and want to speak to Pete Roe or Steve Taitz, please e-mail or call.

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