1031 Exchange for a Restaurant Building

Selling to your franchisee: the building goes to the intermediary, the kitchen, the franchise and the goodwill do not

When the operator owns the building and sells both to a franchisee or another operator, the deal is an applicable asset acquisition under IRC §1060 because goodwill can attach, so the price is allocated by the residual method and both parties file Form 8594. The instructions put land, the building and furniture and equipment in Class V, franchises and other §197 intangibles in Class VI, and goodwill and going-concern value in Class VII.

Inside Class V, the walls, partitions, plumbing, wiring, HVAC, restrooms and interior finishes are structural components of real property under Treas. Reg. §1.1031(a)-3, while hoods, ranges, walk-in coolers, dish machines and registers are machinery that is not a constituent part of the building. Only the amount allocated to land, building and structural components is wired to the qualified intermediary.

A liquor license is a license to operate a business on the land and is excluded by the same regulation regardless of its state-law status. If the building is owned by one LLC and the restaurant by another entity, each sells its own assets, and the real-estate LLC is the taxpayer that must acquire the replacement.

Recapture math: 5-year equipment, 15-year build-outs and what a complete exchange actually defers

IRS Publication 946 places restaurant equipment in asset class 57.0 with a 5-year recovery period, and IRC §1245 taxes its gain as ordinary income up to the depreciation taken. Interior improvements placed in service after the building itself are qualified improvement property under IRC §168(e)(6), 15-year property that excludes enlargements, elevators and the structural frame and that qualifies for the 100% bonus allowance Public Law 119-21 restored for property acquired after January 19, 2025.

Bonus depreciation on QIP creates additional depreciation under §1250(b)(1), the excess over straight-line, which is ordinary income on a cash sale; the straight-line portion is unrecaptured §1250 gain at up to 25% under §1(h)(1)(E). In an exchange §1250(d)(4) holds that ordinary layer back except to the extent of gain recognized on boot.

Hypothetical: an operator sells building and business to the franchisee for $2,500,000, allocated $1,800,000 to real estate, $250,000 to fully depreciated equipment and $450,000 to franchise rights and goodwill. The real estate has a $1,200,000 adjusted basis that includes a $300,000 kitchen build-out expensed in 2024, so the $600,000 real-estate gain, of which about $260,000 is bonus excess over straight-line, is deferred by a complete exchange; the $250,000 equipment gain is ordinary income and the $450,000 is taxable business gain in the year of sale.

Single-tenant QSR, multi-tenant pad or dark box: how net-lease buyers price restaurant real estate

Restaurant real estate has a dedicated public buyer: Four Corners Property Trust's 2025 10-K reports 1,303 properties in 48 states, 316 of them Olive Gardens producing 31.7% of cash rent, and it acquired 105 properties in 2025 for $325.5 million across 35 brands. The same filing discloses tenant EBITDAR coverage of 5.1x for the portfolio and 3.5x for restaurant brands outside Darden, which is the metric a buyer will compute from your tenant's unit-level statements.

Essential Properties' 2025 10-K shows quick-service restaurants at 8.7% of base rent across 461 properties and casual dining at 6.0% across 132, with 66.8% of its rent under master leases that bind several sites to one operator on an all-or-none basis. A single-tenant box with a strong guarantor and a long remaining term trades to these buyers; a multi-tenant pad with short leases trades to local investors on a different basis.

A dark box is priced as land plus a purpose-built shell, because the next restaurant tenant will want its own kitchen layout and the drive-thru configuration may not fit, and a non-restaurant user will demolish the build-out you paid for. Selling while the lease has term left, rather than after a closure, is the difference between a net-lease price and a redevelopment price.

Timeline: a franchisee buyer with bank financing versus a REIT paying cash, against the 45- and 180-day clocks

A franchisee buyer typically needs lender approval of both the business and the real estate, franchisor consent to the transfer, and a Form 8594 allocation, which stretches the period between contract and closing; a net-lease REIT buying only the real estate on a sale-leaseback closes faster but requires quarterly unit-level and corporate financials from the tenant, as Essential Properties describes as standard in its lease form. Either way the exchange clocks in our deadline guide start only at closing, and the replacement search should be finished before then.

Identify three candidates, or more under the 200% rule, and include one that can close on short notice; a DST with an open subscription serves that role because it does not depend on a third party's financing. The qualified intermediary must be engaged before closing, as set out on our intermediary page.

• Before listing: separate the real-estate and business contracts, assemble three years of unit-level P&Ls, confirm who owns each fixture.
• At contract: fix the allocation in writing, engage the intermediary, obtain franchisor consent if the buyer is a franchisee.
• Day 0 to 45: identify replacements in writing, with one that can close quickly.
• Day 45 to 180: close the replacements; boot received is taxed as the ordinary recapture layer first.

Leaving restaurant-tenant risk behind: diversified net-lease DSTs and other passive replacements

The owner who has watched one concept fail in a building usually wants many tenants next time. A diversified net-lease DST under the traditional DST structure holds dozens of properties across sectors, the DST asset classes guide compares restaurant and retail tenants with industrial, medical and multifamily, and our triple-net page explains the coverage and guarantor tests that apply whether you buy one building or a trust interest.

The trade-off is set by Rev. Rul. 2004-86: the trustee may not renegotiate or enter new leases except on a tenant's bankruptcy or insolvency, so a DST cannot re-tenant a dark restaurant the way you could, and the tenant mix at purchase is the tenant mix you own. A cash-out DST suits sellers replacing a large loan payoff, and a direct title security keeps deeded ownership with institutional management.

Case pattern: a local operator sells the building to the franchisee for $1,800,000 of real estate, exchanges into a diversified net-lease DST with a modest allocation to a medical DST, and reports the equipment and goodwill legs on that year's return. Whether that mix or another restaurant building fits you is a decision to work through with your CPA before the allocation is signed.