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Business goodwill does not qualify for a 1031 exchange, and it never reaches a DST. The Tax Cuts and Jobs Act limited Section 1031 to real property for exchanges completed after December 31, 2017 (subject to a narrow transition rule for property transferred before January 1, 2018). A Delaware Statutory Trust holds real property, so the goodwill line on a business sale was never a place those proceeds could go — even under the pre-2018 rules that still allowed some personal property exchanges.
Why the goodwill line matters in a 1031 exchange
Owners selling a restaurant, a medical practice, an auto shop, or any operation bundled with real estate often assume the full sale price can roll into an exchange. It can't. Section 1031(a)(1), as rewritten by the 2017 law, limits deferral to "real property held for productive use in a trade or business or for investment." Goodwill, customer lists, trade names, and other intangibles sit outside that definition entirely.
For anyone structuring a Delaware Statutory Trust exchange out of a business sale, the split sets how much of the proceeds actually reaches the qualified intermediary and how much is taxed at closing in 2026 dollars rather than deferred.
What to gather before testing eligibility
- The closing statement or asset purchase agreement showing the price allocation between real property and intangible assets
- IRS Form 8594 (Asset Acquisition Statement Under Section 1060), which buyer and seller each file when goodwill or going concern value attaches to the assets transferred
- A CPA or tax attorney to confirm which line items meet the real property definition in Treasury Regulation 1.1031(a)-3
- Enough runway before the 45-day identification deadline to fix the real-property-only exchange value, since that figure — not the total sale price — sets what replacement property has to absorb
How the real property portion of a mixed sale gets isolated
Separate the price into real property and intangible components
Start with the allocation schedule in the asset purchase agreement. A sale spanning land, a building, equipment, inventory, and goodwill is typically itemized under IRC Section 1060. Only the real property lines have any chance of qualifying. The common error is treating the entire sale price, goodwill included, as the exchange amount, which overstates what a qualified intermediary can hold.
Confirm which line items are real property
Treasury Regulation 1.1031(a)-3, finalized in December 2020 to implement the TCJA changes, defines real property to include land, improvements such as permanently affixed structures, and a limited set of intangible interests tied directly to real estate, including certain leaseholds, easements, and options. Goodwill representing brand reputation, customer relationships, or an assembled workforce fails that test no matter how the closing documents label it.
Understand why goodwill failed the like-kind test before 2018 too
The exclusion is not purely a TCJA creation. Under the pre-2018 personal property rules, Treas. Reg. §1.1031(a)-2(c)(2) provided that the goodwill or going concern value of one business is not of a like kind to the goodwill or going concern value of another — the reasoning being that goodwill reflects one enterprise's reputation, location, and customer base. Goodwill therefore seldom cleared the like-kind standard even in years when other personal property still qualified.
Quantify the boot created by the goodwill allocation
Proceeds allocated to goodwill are boot: value received outside the exchange and taxed in the year of sale. Pinning that number down early matters, because misjudging it leaves a gap between the deferral expected and what the closing statement actually supports. Calculating boot in a 1031 exchange works the same way here as in any partial exchange; the general mechanics are covered in the Top1031 Learn library.
Route only real property proceeds through the qualified intermediary
The closing agent and the qualified intermediary handle only the funds tied to the real property allocation. Goodwill proceeds go directly to the seller. Running non-qualifying funds through the intermediary risks constructive receipt problems that reach beyond the goodwill slice.
Size replacement offerings to the real property allocation
A Delaware Statutory Trust holds real property, and under Revenue Ruling 2004-86 a beneficial interest in a properly structured DST is treated as an undivided interest in that real property for Section 1031 purposes. It is not a claim on a selling business's brand or customer base. Screening offerings in the Top1031 directory against actual real-property proceeds, rather than the full sale price, is what keeps an identification list from coming up short.
Report the split transaction accurately
The exchanged portion and the taxable portion are reported differently: the like-kind exchange on Form 8824, the asset allocation on Form 8594, with gain on the intangibles reported under the ordinary sale rules. A mismatch between sale documents and tax filings draws scrutiny — the presence of goodwill in the deal does not.
Troubleshooting
The closing statement doesn't itemize goodwill separately. Request an amended allocation from the buyer's accountant, or work from the Form 8594 both parties file when goodwill or going concern value attaches to the transferred assets.
Buyer and seller filed different Form 8594 allocations. Reconcile before the 45-day identification window closes. Inconsistent intangible-versus-real-property splits invite review of both returns.
A franchise agreement or trade name is bundled into the real estate transfer. Value the franchise or license separately and exclude it from the exchange amount before identifying replacement property.
Marketing language suggests a DST can absorb business value. It can't. A DST offering is a trust's capital raise against real property and has no claim on an operating business's brand, customer base, or goodwill.
The assumption that goodwill sinks the whole exchange. It doesn't. The real property portion still exchanges normally; only the goodwill allocation is taxed. Partial deferral on a mixed business sale is ordinary, not a sign something went wrong.
Tools and documents involved
- Asset purchase agreement with a line-item allocation schedule
- IRS Form 8594, filed by both buyer and seller
- A CPA or 1031 exchange attorney to confirm the real property line items
- IRS Form 8824 for the exchanged portion of the sale
- A qualified intermediary holding only the real-property-allocated funds
Personal goodwill versus enterprise goodwill
Valuation disputes usually split goodwill in two: personal goodwill, tied to an individual owner's reputation and relationships, and enterprise goodwill, tied to the business itself. The distinction matters for allocating purchase price and for state tax planning. It changes nothing here. Both are intangible assets under the post-2018 version of Section 1031, and both fail the real property test the same way. There is no side door through personal goodwill into a DST exchange, however the sale documents are worded.
What to look at next
With the real property allocation confirmed and the boot on the goodwill portion quantified, the open questions are where that real property allocation goes and how the split gets reported: calculating boot without losing deferral, reporting a DST replacement property on Form 8824, how DST ownership compares with a direct purchase of replacement property, and the tradeoffs of DST structures generally. Offering-level detail sits in the Top1031 directory, and the underlying concepts are explained in Learn.
FAQ
Does business goodwill qualify for a 1031 exchange in 2026?
No. Section 1031 has applied only to real property for exchanges completed after December 31, 2017, and goodwill is an intangible tied to a specific business. That is unchanged in 2026.
Was goodwill ever eligible before 2018?
Rarely. Even when Section 1031 covered personal property, the regulations treated one business's goodwill as not like-kind to another's, so it seldom qualified.
Is customer list value also excluded?
Yes. Customer lists, trade names, non-compete agreements, and assembled workforce value are intangible assets excluded under the same real-property-only rule.
How is the real property share of a sale price determined?
From the allocation schedule in the purchase agreement and IRS Form 8594, which reports how the total price splits across asset classes, including real property, equipment, inventory, and goodwill.