How to Avoid Capital Gains Tax When Selling a Business

By Hans Goldstein, EA, enrolled agent, admitted to practice before the IRS · Updated November 1, 2026

Planning ahead? the 5-year tax plan for selling before retirement.

Can you avoid capital gains tax when you sell a business?

Almost never completely, and anyone promising otherwise is selling something. The honest list has three groups, and which group a strategy sits in matters more than its name.

• Erases the tax on part of the gain. Qualified small business stock (IRC 1202), a hold until death (IRC 1014) and growth inside an Opportunity Zone fund held 10 years (IRC 1400Z-2(c)). Each has hard entry rules, so most sellers do not qualify for any of them.
• Lowers the rate or the base. An installment sale that fills lower brackets each year, a charitable remainder trust that turns part of the gain into a deduction and a gift, a move to a lower-tax state before the sale, and a better allocation of the price.
• Moves the bill to later years. A Section 1042 ESOP sale, a Section 1031 exchange or Section 721 contribution of real estate, and an Opportunity Zone investment of the gain itself. The gain is still there, in a lower basis, until something ends the deferral.

For a seller the useful question is what you net on the same price, not whether the tax can be avoided. Numbers below are for the 2026 tax year (Rev. Proc. 2025-32).

Which strategy fits which business sale? The decision table

Real estate your company owns is a separate question from the company. The building can sometimes go into a 1031 exchange or a 721 contribution even though the operating business cannot. See 1031 exchange alternatives for how those compare.

What does an installment sale save on a $4,000,000 business sale?

We ran one sale four ways on the Big Sale Tax engine, 2026 law (Rev. Proc. 2025-32). A married couple sells the assets of a manufacturing LLC for $4,000,000 of goodwill gain with $100,000 of other income each year. Taking everything at closing in Texas costs $786,400 of federal tax, and they keep $3,213,600.

Taking five yearly payments of $800,000 costs $640,200 of federal tax, and they keep $3,359,800, which is $146,200 more from the same price.

In California the same two choices cost $1,278,239 and $1,011,077 in federal and state tax together, a difference of $267,162.

The saving comes from rates, not magic: about two-thirds of each $800,000 slice is taxed at 15%, while in a one-year $4,000,000 sale about 86% of the gain lands above the $613,700 of taxable income where the 20% rate starts for a married couple in 2026 (Rev. Proc. 2025-32).

The cash-sale run also triggers $18,360 of alternative minimum tax; the five-year run triggers none.

Three things shrink or erase that saving. Depreciation recapture and ordinary items such as inventory profit are taxed in year one, so a real sale has a larger year-one bill than this goodwill-only example.

If the owners do not materially participate, the 3.8% tax (IRC 1411) applies and spreading helps less in some years. And the saving is only real if the buyer pays: the note is your risk, which is why a down payment, security and a guarantor from the buyer matter.

Which entity type are you selling, and why does it change the answer?

The tools open to you depend on what you hold, not what you want.

• LLC or S corporation, asset sale. Installment sale, charitable remainder trust (LLC interests held before a binding deal), Opportunity Zone investment of the gain, state residency. QSBS and Section 1042 do not apply. See capital gains tax on the sale of a business for the asset-by-asset split.
• C corporation, stock sale. QSBS (IRC 1202) if the shares were issued to you and the company stayed under the asset limit, Section 1042 if an ESOP buys, an installment sale of the shares, and personal goodwill carved out of the corporate sale. See C corporation sale and double tax.
• S corporation stock sale. A buyer who wants a stepped-up basis may ask for a Section 338(h)(10) election, which makes it a deemed asset sale. See Section 338(h)(10) and asset sale vs stock sale.
• Sole proprietor. Always an asset sale. Personal goodwill and the installment method are the main levers. See personal goodwill.

How much does your state change the bill?

A great deal, and it is the one lever you control before you sign. A single seller of a $3,000,000 business pays the same federal tax in every state, but the state layer runs from nothing in the nine states with no state tax on the gain to the high-tax states.

The Exit Tax Map shows what a single seller keeps at $1,000,000, $3,000,000 and $10,000,000 in all 50 states and DC, with every state rule dated and linked to its source.

In our own example the California owners pay $491,839 of state tax on a cash sale that costs Texas owners nothing at the state level.

Moving does not always change the bill. A state can tax gain from a business located there even after you leave, and some states bring installment gain forward when you move. Read state residency change before a sale before you rely on it, and note that California keeps taxing installment gain on stock sold while you were a resident.

What are the common mistakes when trying to avoid the tax?

• Picking a tool before knowing the entity. A 1031 exchange, a QSBS claim or an ESOP rollover each fails for the wrong entity type (IRC 1031, IRC 1202, IRC 1042).
• Signing first. A charitable remainder trust or a residency move that follows a binding sale agreement can be treated as your sale. Plan before the letter of intent turns into a contract.
• Ignoring the price allocation. The split across Form 8594 classes decides how much is ordinary income. See purchase price allocation.
• Treating a deferral as a saving. A Section 1042 rollover or an Opportunity Zone investment postpones the bill; compare what you net after the deferral ends, not the 2026 tax alone.
• Forgetting the 3.8% tax. Passive owners and C corporation shareholders usually owe it (IRC 1411). See net investment income tax on a sale.

What should you do before you sign a letter of intent?

Put three numbers side by side on your own deal: the cash-sale bill, the bill under the two or three strategies that fit your entity, and what the buyer would pay for each structure.

The best answer for the seller is sometimes a lower price on a better structure, and that comparison is what a Big Sale Tax Analysis runs. Start with the capital gains tax calculator for a cash-sale baseline, then bring your allocation and entity details to a CPA or attorney who will sign the return.

How much tax would you owe? Run your own numbers

Also free: the book Same Sale, Different Tax, the same $1,000,000 gain taxed ten ways. Want it run on your sale? Book a free scope call to see whether the Big Sale Tax Analysis is worth it.

Who you will talk to

Hans Goldstein · Sacramento, California
Hans Goldstein: Tax & Exit Planning, an independent practice. Enrolled Agent, admitted to practice before the Internal Revenue Service. CA Insurance License #4273294, NPN 20602398.

What happens first

You fill in the short form for a free scope call, about 5 minutes. Hans reviews every one personally and replies within 1 business day. If it is a fit, you get a link to book the call.

The scope call

Fifteen minutes, free: price, timeline, what you are selling and what the money is for. Scope means you hear whether the analysis is worth it for your sale.

What you get

A written side-by-side comparison of your cash-sale baseline against every path that fits, year-by-year numbers, a written recommendation, and a review meeting with you and, if you like, your CPA and attorney.

What it costs

The scope call is free. The Big Sale Tax Analysis is $5,000 per household per transaction, only if you decide it is worth it. No retainer, no hourly billing, no obligation to use any strategy.

How Hans is paid

The $5,000 fee pays for analysis only and is not reduced or credited if you buy anything. You are never required to buy anything. No referral fees are paid to or received from brokers, CPAs or attorneys. Hans is also a licensed insurance producer with a separately owned insurance business. That business is not part of this engagement, and the analysis does not recommend insurance products. If you later choose an installment sale funded through an insurance company, that company pays Hans a commission through his separate insurance business. He may be compensated by that business if you use an insurance-funded installment sale. Hans is an Enrolled Agent (EA), admitted to practice before the Internal Revenue Service. He is not a CPA, attorney or registered investment adviser; the analysis models tax effects and does not recommend specific securities. Read the disclosures.

Book a free scope call or call 213-340-2018. Hans answers or calls back the same business day.

Frequently asked questions