Owning a business


Capital Gains Tax Deferral

Paul Cronin

Paul Cronin

February 17, 2024 ⋅ 2 min read

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Congratulations! If you’re googling “how capital gains tax deferral works”, that probably means you recently sold your business. Capital gains tax deferral allows you to postpone paying taxes on capital gains from the sale of an asset by reinvesting the proceeds into a similar asset within a specified time frame. This strategy is often used in real estate and investment contexts to defer taxes and potentially increase investment returns. Baton’s team of business sale experts has assembled an introduction to capital gains tax deferral.

  1. Sale of asset: You sell an asset, such as real estate, stocks, or a business, and realize a capital gain—the difference between the selling price and the original purchase price.

  2. Identification of replacement property: Within a certain period, typically 45 days from the sale (under the rules of Section 1031 of the Internal Revenue Code for real estate exchanges), you must identify potential replacement properties that you intend to acquire with the proceeds from the sale.

  3. Reinvestment: You must reinvest the proceeds from the sale into one or more replacement properties within a specified time frame, typically 180 days from the sale.

  4. Deferral of capital gains tax: By completing the reinvestment into the replacement property within the specified time frames, you can defer paying capital gains tax on the original sale. The capital gains tax is deferred until you sell the replacement property without reinvesting the proceeds into another eligible property.

It's important to note that capital gains tax deferral is subject to specific rules and regulations set forth by tax authorities, such as the Internal Revenue Service (IRS) in the United States. These rules may have limitations on the types of assets eligible for deferral, time frames for reinvestment, and other requirements. Additionally, it's highly recommended to consult with a tax advisor or financial professional familiar with capital gains tax deferral strategies, as they can provide personalized guidance based on your specific situation and objectives.