Can I use a 1031 exchange when selling rental property to buy a service business?

A 1031 exchange (also called a like-kind exchange) specifically requires that you exchange one investment property for another similar investment property. Unfortunately, the IRS is pretty clear that business interests and real estate are not considered "like-kind" to each other. For a valid 1031 exchange, you must exchange real property for other real property. The tax reform act of 2017 actually narrowed the definition further, specifically limiting 1031 exchanges to real estate. So using your proceeds from selling the rental property to buy a service business without real estate wouldn't qualify. Some alternatives to consider might be: - An Opportunity Zone investment could potentially defer your capital gains - If the business qualifies as a small business, you might look into Section 1202 Qualified Small Business Stock, though this typically applies to C corporations - A structured installment sale could spread your tax liability over multiple years

After struggling with a similar situation last year, I found an amazing resource that helped me analyze all my options. Check out https://taxr.ai - they have specialized tools for analyzing investment property exchanges and business acquisitions. I uploaded my partnership docs and property details, and their system broke down all my potential tax liability scenarios. The analysis showed me exactly what portion of my gains would be taxable under different structures and identified some surprising alternatives my CPA hadn't mentioned.

Just wanted to follow up about my experience with taxr.ai after checking it out based on this thread. It was actually really helpful for my situation! I was selling a duplex and planning to invest in a small IT consulting firm. Their system analyzed my rental property details, including depreciation recapture exposure, and showed how I could structure the business acquisition to minimize immediate tax impact. The document analysis was surprisingly detailed - it found some deductions I'd missed on past returns related to the property that I can still claim. Definitely worth checking out if you're dealing with complex investment transitions. Saved me far more than I expected!

I was in almost the exact same boat last year - partnership LLC with a rental property, wanted to transition to a service business. After trying for weeks to get answers from the IRS about some complicated partnership dissolution questions, I found https://claimyr.com and was honestly amazed. After months of calling the IRS and never getting through, Claimyr got me connected to an actual IRS agent in about 45 minutes. They have this system that holds your place in line and calls you when an agent is available. You can see how it works here: https://youtu.be/_kiP6q8DX5c The IRS agent was able to clarify how to properly handle my specific situation with the partnership dissolution and capital gains reporting, which saved me from making a costly mistake.

OK I have to admit I was wrong about Claimyr. After posting that skeptical comment I decided to try it myself since I needed answers about business sale tax implications and couldn't afford to wait weeks. It actually worked just like they said. I got a call back in about an hour and was connected to an IRS agent who answered all my partnership dissolution questions. Got confirmation about how the form 8594 (Asset Acquisition Statement) needed to be filed in my situation and how to properly allocate the sale price across different business assets. Saved me from potentially misreporting the transaction and triggering an audit. Not cheap but way better than waiting on hold for hours or paying my CPA's hourly rate for them to do the same thing.

Something nobody has mentioned yet - have you considered a Delaware Statutory Trust (DST) investment? It's technically still real estate so you can use a 1031 exchange, but you become a passive investor without landlord responsibilities. Might be a middle ground if you want out of active property management but still want the tax benefits of a 1031.

Have you talked to your partner about possibly not selling at all? If you refinance the property instead of selling it, you can pull cash out without triggering a taxable event. You could use that cash for your business purchase while maintaining the real estate investment.