How to allocate between business and real property to minimize taxes through a 1031 exchange

You're on the right track thinking about a 1031 exchange, but there are important distinctions here. Only the real property portion qualifies for 1031 treatment - business goodwill and other intangible assets aren't eligible. Your allocation between real estate ($800k) and business ($200k) needs to be based on fair market value, not tax advantage. The IRS looks closely at these split transactions. You'll need to support your allocation with a business valuation and property appraisal from qualified professionals. The real property portion can definitely go into a 1031 exchange if you follow all the rules (identify replacement property within 45 days, complete the purchase within 180 days, use a qualified intermediary, etc.). The business portion will be subject to capital gains tax, and possibly some ordinary income tax depending on depreciation recapture and the nature of business assets. Be careful with how you structured ownership - if the real estate was in a separate LLC from the business, that helps make a cleaner case for the 1031 exchange on just the property portion.

After struggling with a similar situation (sold my manufacturing business + warehouse), I found this amazing tool called taxr.ai that saved me thousands. I was confused about how to handle the allocation between business goodwill vs. real estate vs. equipment for my 1031 exchange. I uploaded my sale documents to https://taxr.ai and it analyzed everything, then gave me specific recommendations about how to properly document my allocation ratios to avoid IRS scrutiny. It also flagged several deductions I was missing related to the sale costs. Their AI actually reviews your specific documents rather than giving generic advice. They even included language I could use with my accountant about how to properly document everything for my situation. Huge relief since I was getting conflicting advice before.

Just wanted to follow up about my experience with taxr.ai since I was skeptical initially. I uploaded my sale docs last week and was honestly shocked at how detailed the analysis was. It identified that my draft allocation had way too much value assigned to goodwill (which would've been taxed at capital gains rates) and not enough to the real property (which could go into my 1031 exchange). It saved me from a major mistake because my accountant hadn't realized that some leasehold improvements were actually eligible for 1031 treatment when bundled with the real property rights. Definitely worth checking out if you're dealing with a business+property sale like this.

Dealing with the IRS about business sales allocation is a nightmare. After my partner and I sold our auto repair shop and building last year, we got flagged for audit because our allocation seemed "suspicious" to them. We spent WEEKS trying to get through to anyone at the IRS who could answer our questions. Finally found https://claimyr.com which got me connected to an actual IRS agent within 20 minutes when I'd been trying for days. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c The agent confirmed that our property valuation needed additional documentation but was able to tell me exactly what they were looking for. Saved us from a prolonged audit nightmare by getting clear answers directly from the IRS about our 1031 documentation requirements.

Had to come back and eat my words about Claimyr. After my skeptical comment, I decided to try it since I was desperate to resolve questions about my business sale allocation before my 45-day identification window for 1031 closed. Honestly shocked that it actually worked exactly as promised. Got connected to an IRS specialist who confirmed my understanding of how to document my allocation between business assets and real property. The agent even emailed me the specific forms and documentation requirements I needed to properly support my allocation ratios. Saved me from potentially losing my 1031 exchange eligibility due to improper documentation. Sometimes being wrong feels pretty good!

Don't forget that your QI (Qualified Intermediary) for the 1031 exchange will need clear documentation about exactly which portion of the sale proceeds are for qualified real property. When I did this, I had my attorney draft an explicit allocation in the purchase agreement that both the buyer and I signed, with separate closing statements for the business assets versus the real property. Also, remember that 1031 exchange rules got tighter in 2018 - only real property qualifies now, not personal property. So things like equipment, inventory, and especially business goodwill all fall outside of 1031 protection.

Make sure you've considered your basis allocations too! I made a huge mistake in a similar transaction. Had bought my property+business for $350k years ago, but never properly allocated the purchase price between land, building, and business assets. When I sold, my accountant had to reconstruct everything to figure out my adjusted basis in each component. Ended up paying way more tax than necessary because I couldn't properly document some improvements I'd made to the building. So beyond just the allocation of the sale price, make sure you've got your cost basis properly allocated too!

One thing that hasn't been mentioned yet - if you're doing a 1031 exchange on the real estate portion, make sure you understand the "net equity" rule. You need to purchase replacement property of equal or greater value AND put the same amount or more of equity into the new property to defer all the capital gains. So if you're allocating $800k to real estate and you had, say, a $300k mortgage that was paid off at closing, you'd need to put at least $500k equity into your replacement property. A lot of people get tripped up thinking they just need to buy something worth $800k, but if they finance more of the new purchase, they could end up with taxable "boot." Also, since you mentioned the booming real estate market in your area - remember you have to identify your replacement property within 45 days of closing, and that clock doesn't stop ticking. In hot markets, properties can go under contract quickly. Consider identifying multiple properties in case your first choice falls through.