Tax Planning for Real Estate Owners

You Own the Shop, Not Just the Business

Here’s how to sell it without overpaying the IRS — or becoming a landlord.

By William Yex, CFP®, CEPA®, Wealth Management Advisor

If you are like most trade business owners, you did not just build the business – you own the building it operates out of. The shop, the warehouse, the yard where the trucks sit overnight. It has been an asset quietly building equity in the background while you were busy running calls, managing crews, and growing the company.

So, when the day comes to sell the business, most owners think about one number: what the business sells for. They do not think about the second transaction happening at the same time – the sale of the real estate underneath it. And that second transaction can create a tax bill that catches owners completely off guard.

**Illustrative examples only – actual results will vary based on individual circumstances.**

WHAT THIS ARTICLE COVERS •  Why selling your shop can trigger a bigger tax bill than selling the business itself •  How a 1031 exchange defers that tax bill – and the catch most owners run into •  The DST: real estate ownership with no landlord duties •  The 721 exchange: rolling into a larger, diversified, professionally managed portfolio

 

The Building Is Often The Bigger Tax Problem

Here is what most owners do not realize: after years of depreciating that building on your tax return, its basis – what the IRS considers you to have “paid” for it – is often far lower than what it is actually worth today. Sell it, and you are not just paying capital gains tax on the appreciation. You are paying depreciation recapture on top of it, often at a higher rate.

For an owner who has held a building for 15 or 20 years, that combination can turn a proud moment – selling the business you built – into a tax bill that eats a meaningful chunk of the proceeds.

The 1031 Exchange: The Tool Most Owners Have Heard Of

A 1031 exchange lets you sell investment or business real estate and defer the capital gains and depreciation recapture tax, as long as you roll the proceeds into another “like-kind” property within IRS timelines – generally 45 days to identify a replacement property and 180 days to close on it.

Note: since 2017, this only applies to real property. The business itself – the goodwill, the equipment, the customer relationships – does not qualify. This is specifically about the real estate under the business.

The Catch Nobody Mentions: You Are Trading One Job for Another

Here is where most owners get stuck. To complete a 1031 exchange, the traditional move is to buy another piece of investment real estate – an apartment building, a strip mall, another commercial property. And that means you are now a landlord.

You know exactly what that means, because you have spent your career being the one who gets the call. Now imagine getting that call yourself – a tenant with a leak, an HVAC unit down, a lease dispute – at 10 PM, except this time there is no crew to dispatch. You just sold a business so you could stop working nights. Buying a rental property directly can quietly put you right back in that seat.

Think of It Like A Hunting Lease

There is a way to defer the tax and stay out of the landlord business entirely, and it maps almost exactly to a decision a lot of trade owners have already made outside of work.

Option 1: Buy Your Own Land

You could buy your own hunting property outright. It is yours – but now you are the one clearing roads, planting food plots, fixing the tractor, and dealing with whatever shows up on the trail cam at 2 AM. Owning a rental property directly is the same trade: you get the asset, but you also get the maintenance calls, the tenant issues, and the second job.

Option 2: Lease A Spot In A Managed Club

Or you could lease a membership in a managed hunting club instead. You still get to hunt – you still have access to the land and everything that comes with it – but someone else maintains the property, manages the leases, and handles the headaches. You just show up.

That second option is what a Delaware Statutory Trust, or DST, does for real estate.

What A DST Actually Is

A DST is a legal structure that holds title to institutional-grade real estate – think large apartment communities, medical office buildings, industrial warehouses, or self-storage portfolios – on behalf of multiple investors. Each investor owns a fractional, undivided interest in the trust, and under IRS Revenue Ruling 2004-86, that interest counts as “like-kind” real property for 1031 purposes.

In plain terms: you can 1031 exchange your shop’s sale proceeds into a DST, defer the tax, and own a piece of professionally managed real estate – without ever fielding a maintenance call.

Strategy 1031 Exchange Into a DST Qualifies as like-kind real property for 1031 purposes (Rev. Rul. 2004-86). Professionally managed – no landlord responsibilities. Allows proceeds to be spread across multiple properties and property types instead of one building. Generally limited to accredited investors. Illiquid, with a typical hold period of roughly 5–10 years – not a fit for money you may need access to. Involves real estate risk (vacancy, market, interest rate, and sponsor risk) and is not guaranteed to preserve or grow value.

Step Two: Joining The Bigger Club (The 721 Exchange)

Many DST sponsors eventually offer investors a further option once the DST’s hold period runs its course: instead of cashing out and starting the 1031 clock over again, you can contribute your DST interest into a much larger, diversified REIT (Real Estate Investment Trust) operated by the same sponsor family, in exchange for operating partnership units. This is known as a 721 exchange, or UPREIT transaction.

Back to the hunting analogy: this is the equivalent of several individual leases merging into one large, professionally run co-op. Instead of your outcome depending on one property or one lease, you now hold a stake across the entire operation – more acreage, more variety, spread-out risk, and a team managing the whole thing rather than one property.

Why This Matters

A single DST still carries concentrated exposure to one sponsor and a handful of properties. Rolling into the larger REIT via a 721 exchange can meaningfully diversify that exposure across many properties, markets, and property types – while continuing to defer the original capital gain. Some larger REIT platforms may also offer more liquidity options than a single DST, though this varies by sponsor and is never guaranteed.

Strategy 721 Exchange / UPREIT Contributes a DST interest into a diversified REIT in exchange for operating partnership units. Continues the original tax deferral – no capital gain is recognized on the contribution. Spreads exposure across many properties and markets instead of a single DST. Terms, fees, and liquidity provisions vary by sponsor and are not guaranteed.

Why This Sequence Fits Trade Business Owners Specifically

You already know what it is like to be on call for a building. That is the whole point of this strategy – it lets you keep the tax advantage of owning real estate without picking up a second version of the job you just sold the first one to get away from. And because DSTs typically allow smaller minimum investments than buying a whole property outright, the proceeds from one shop can often be spread across several properties and asset types instead of concentrated in a single building the way it was before.

Quick Example An electrical contractor sells his business and the building it operates out of for a combined $1.4M. The building alone, after years of depreciation, carries a low basis – without planning, the sale could trigger a substantial combined capital gains and depreciation recapture bill on the real estate portion. Instead, he 1031 exchanges the building’s proceeds into a diversified DST portfolio, deferring that tax entirely and stepping away from any landlord duties. Several years later, when the DST’s hold period ends, he elects a 721 exchange into the sponsor’s larger REIT – further diversifying his real estate exposure while the original gain remains deferred.

The Bottom Line

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None of this works well in isolation, and none of it works on short notice. A 1031 exchange requires a qualified intermediary lined up before the sale closes – not after – along with a CPA who understands recapture and a wealth advisor who can evaluate whether a DST fits your goals, your liquidity needs, and your risk tolerance. The 45-day identification window moves fast once your sale closes, so this is a conversation to have months before you list the business, not after you’ve already signed a letter of intent.

If you would like to walk through what a 1031 exchange could look like for your shop and your business, I am happy to have that conversation. No pressure, no pitch – just a working session to see where the opportunities are.

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This article is for informational purposes only and does not constitute tax, legal, or investment advice. Please consult with a qualified CPA, tax professional, or attorney regarding your specific situation.

1031 exchanges, Delaware Statutory Trusts (DSTs), and 721 UPREIT exchanges involve substantial risk, including illiquidity, loss of principal, and the potential for reduced or suspended distributions. DSTs and non-traded REIT interests are generally offered only to accredited investors, are not publicly traded, and involve fees and expenses in addition to those described here. There is no guarantee that any 1031 exchange will qualify for tax deferral, that a suitable replacement property will be identified within IRS timelines, or that a DST or REIT will perform as anticipated. Prospective investors should carefully review a DST’s or REIT’s Private Placement Memorandum and consult with their tax and legal advisors before investing.

Apollon Wealth Management, LLC (“Apollon”) provides advice and makes recommendations based on the specific needs and circumstances of each client. For clients with managed accounts, Apollon has discretionary authority over investment decisions. Investing involves risk and clients should carefully consider their own investment objectives and never rely on any single chart, graph, or marketing piece to make decisions. The information contained herein is intended for information purposes only, is not a recommendation to buy or sell any security and should not be considered investment advice. See Apollon’s Form ADV Client Disclosure Brochure for information about risks and considerations relating to the services offered through Apollon. This is available on our website, www.apollonwealthmanagement.com.  Apollon does not provide tax advice; individuals are strongly advised to consult with a tax professional before making any tax-related decisions. Tax strategies are general in nature and may not be suitable for all individuals. The information provided herein may not be relied on for purposes of avoiding taxes. The specific considerations for you may need expertise or review by a tax professional, licensed insurance provider, estate planning attorney or other professional to determine how it applies to you. Information provided is generic in nature, for educational purposes and not specific advice. Speak with your tax professional about your specific personal considerations before making any planning decisions.

Apollon Wealth Management  ·  For educational purposes only. Not personalized tax or financial advice.