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I am selling a business and starting up another business. I

Customer Question
will have a profit from...
I am selling a business and starting up another business. I will have a profit from the business I am selling of 25k. Can I put this money into inventory at the new business and not pay 25k in gains for the business I have sold. If not how can I pay less tax on the 25k of the business I have or will sell.
Submitted: 8 years ago.Category: Tax
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Answered in 8 minutes by:
4/1/2009
Tax Professional: Lev, Tax Advisor replied 8 years ago
Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 30,660
Experience: Taxes, Immigration, Labor Relations
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Hi Tom,

 

Sorry but - you may not avoid taxes on the selling the business.

Selling and purchase transactions are separate transactions.

 

Depending on type of properties you are selling - you might be able to use section 1031 exchange and purchase similar properties to defer the tax liability, but you may not use inventory for that purposes.

 

Also - if you do asset sale for your old business - some items may qualify for long term capital gain treatment with reduces tax rate.

 

 

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Customer reply replied 8 years ago
Thanks for your quick answer as a follow up with more information. Business A was setup as a plane rental company that is being sold and the business will be shut down. If my new company also purchases another plane can I use the 1031 form to defer the tax liability even thou the new company is not setup as a rental company.
Tax Professional: Lev, Tax Advisor replied 8 years ago

Yes - you likely may deter (not avoid!) the tax liability on this specific item.

 

A tax-deferred exchange is a method by which a property owner trades one or more relinquished properties for one or more replacement properties of "like-kind", while deferring the payment of federal income taxes and some state taxes on the transaction.

The like-kind exchange under Section 1031 is tax-deferred, not tax-free.

When the replacement property is ultimately sold (not as part of another exchange), the original deferred gain, plus any additional gain realized since the purchase of the replacement property, is subject to tax.

section 1031 lists following properties as not qualified - http://www4.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00001031----000-.html

(A) stock in trade or other property held primarily for sale,
(B) stocks, bonds, or notes,
(C) other securities or evidences of indebtedness or interest,
(D) interests in a partnership,
(E) certificates of trust or beneficial interests, or
(F) choses in action
.

Section 1031 of the IRC provides that no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business, or for investment.

Generally, for 1031 deferred like-kind exchange should be used an exchange accommodator as a third party to hold the proceeds from the sale and to purchase the new property. Sec. 1031 requires that within 45 days of the sale of the old property, that you must identify the replacement property and must complete the purchase of the replacement property within 180 days of the sale of the old property.

You may find more details here - http://www.1031.org/about1031/faq.htm

 

Lev
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