We want to structure our exit as an installment sale under Section 453 to spread out our tax liabilities, but the buyer is pushing for an asset sale that triggers immediate depreciation recapture on our specialized equipment. How do we negotiate this purchase price allocation to minimize our tax burden?

Question

Tyler Smith · Accepted Answer

When structuring an installment sale under Section 453, you must understand that the tax benefits can be quickly eroded by immediate depreciation recapture. Under tax law, any depreciation recapture under Sections 1245 or 1250 is recognized as ordinary income in the year of the sale, regardless of when you actually receive the cash. If the buyer insists on an asset sale, your goal is to negotiate a purchase price allocation that shifts value away from high-recapture tangible assets. You should advocate for allocating more of the transaction value to goodwill or long-term non-compete agreements, which are taxed as capital gains and can be deferred over the life of the installment note. To do this effectively, look at your Adjusted Book Value. Re-evaluate individual assets to their actual market value rather than historical accounting book value. Present a detailed breakdown showing that while the equipment is functional, its market value is lower than what the standard accounting schedules suggest, thereby reducing the recapture exposure. In return, you can offer the buyer a slightly more favorable interest rate on the seller note. This keeps the transaction viable for their cash flow while protecting your net proceeds from a massive tax bill in year one. Do not let the buyer dictate the allocation unilaterally. Work with your CPA to run these scenarios before signing the letter of intent so you have a firm baseline for the negotiation.