Selling a business is a big achievement, but without the right planning, it can also come with a major challenge—capital gains taxes. If you don’t use a tax planning strategy, you could lose a large portion of your profits to taxes. However, with smart planning, you may be able to reduce or defer capital gains taxes.
In the following sections, I’ll explain how to avoid capital gains taxes when selling a business. We’ll focus on three key strategies: installment sales, 1031 exchanges, and Qualified Small Business Stock (QSBS).
1. Reduce Taxes With an Installment Sale
An installment sale spreads your payments over several years instead of taking the full sale price at once. This allows you to only pay taxes on the amount you receive each year, which could potentially keep you in a lower tax bracket and reduce your overall tax bill.
For example, if you sell your business for $5 million all at once, you could owe 20% in capital gains tax, totaling $1 million. However, if you structure the sale as $1 million per year over five years, you only owe tax on $1 million each year. There could be additional strategies that you might use to further reduce the tax bill.
This strategy might work well if you don’t need all the money upfront and prefer a steady income while also potentially minimizing taxes.
2. Defer Taxes With a 1031 Exchange
If your business owns real estate, a 1031 exchange allows you to reinvest the proceeds into a new property instead of paying capital gains taxes. This defers your tax bill indefinitely, letting you grow your wealth without an immediate tax hit. You’ll have to follow certain criteria and a timeline to qualify.
Let’s say you sell a building worth $2 million and would normally owe capital gains tax on the sale. But if you reinvest that $2 million into another property through a 1031 exchange, you defer the taxes and continue building wealth.
A 1031 exchange might be right for you if you want to stay invested in real estate while reducing your tax burden.
3. Eliminate Taxes with Qualified Small Business Stock (QSBS)
If your business is a C-Corporation, you may qualify for a tax break under Section 1202, which allows you to eliminate capital gains taxes on Qualified Small Business Stock (QSBS).
You’ll need to meet the following requirements for this strategy:
- You must have held the stock for at least five years.
- The company’s assets must be under $50 million when the stock was issued.
Selling a business doesn’t have to mean handing a huge portion of the proceeds over in taxes, though you’ll need to carry out tax planning with a professional to have the right strategy. You can ask about options like installment sales, 1031 exchanges, and QSBS exclusions.
If you work with a knowledgeable tax specialist, you could learn about your options to reduce capital gains taxes when selling a business.
Matt Chancey is a Registered Representative of Realta Equities, Inc Member FINRA/SIPC and an Investment Advisory Representative of Realta Investment Advisors, Inc. Neither Realta Equities, Inc,. or Realta Investment Advisory are affiliated with Tax Alpha Companies, Including Tax Alpha Title and Tax Alpha Solutions. Realta Wealth is a trade name for the Realta Companies co-located at 1201 N Orange Street., Suite 729 Wilmington, DE 19801.
Realta Wealth is the trade name for the Realta Wealth Companies. The Realta Wealth Companies are Realta Equities, Inc., Realta Investment Advisors, Inc., and Realta Insurance Services, which consist of several affiliated insurance agencies. Securities are offered through Realta Equities, Inc., member FINRA/SIPC and Investment Advisory Services are offered through Realta Investment Advisors, Inc., a US SEC Registered Investment Advisor co-located at 1201 N. Orange St., Suite 729, Wilmington, DE 19801.
This material is for informational purposes only and does not constitute investment, tax, or legal advice. All investments involve risk, including loss of principal, and past performance is not indicative of future results. Examples provided are hypothetical and do not guarantee future outcomes. Tax strategies discussed may not be suitable for all investors; consult a qualified tax professional regarding your situation. This is not a recommendation or solicitation to buy or sell any security or strategy.
Investments discussed may be speculative, illiquid, and involve a high degree of risk, including the possible loss of principal. Such investments are generally available only to qualified or accredited investors.