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Merlo, Accountant
Category: Tax
Satisfied Customers: 9783
Experience:  25+ years tax consulting. Specializing in returns for US citizens living abroad
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I started a business about 7 years ago, I rent the building

Resolved Question:

I started a business about 7 years ago, I rent the building where the business is, I now have the opportunity to sell the business for $125,000. Besides the equipment I bought and the inventory what else could be added to the basis to lower capital gains? Is all my time and energy that was put into the business worth any monetary value towards the basis?

Can I purchase another business with the gains to lower the tax?
Submitted: 7 years ago.
Category: Tax
Expert:  Merlo replied 7 years ago.
Hello lmullaney,

The time and effort that you devote to a business cannot be assigned any value to increase your basis in the business. Your basis will simply be the amount of any capital you originally contributed to the business and the cost of any equipment you have purchased and inventory that you have on hand.

You may defer or lower the tax that will be due on the gain by participating in a 1031 exchange. With a 1031 exchange, you use the proceeds from the sale of the first business to purchase another business. The taxes are not eliminated, but they are deferred until such time as you sell the replacement business.

In order to defer tax on the entire sale, all of the sale proceeds must be used towards the purchase of a new business. If you only use a portion of the proceeds to purchase another business, then a portion of your gain will still be subject to tax.

If you decide to participate in a 1031 exchange, you must use a qualified intermediary to handle the transaction on your behalf. The money from the sale will be paid directly to the intermediary and they will handle the exchange on your behalf. When you participate in a 1031 exchange, you have 45 days from the date you sell the first business to identify the replacement business that you intend to purchase. You then have 180 days to complete the transaction.

If you are interested in participating in a 1031 exchange, here is a link where you can find a qualified intermediary to handle this transaction on your behalf.

If this was helpful please press the Accept button. Positive feedback is also appreciated.

Thank you lmullaney.

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