We want to structure our exit as an installment sale under Section 453 to defer capital gains tax, but we are terrified of buyer default or recapture rules on depreciable property. How do we protect our tax position while ensuring our operational team can monitor the buyer's post-close solvency?

Question

Tyler Smith · Accepted Answer

An installment sale under Section 453 is an effective tool to defer your tax liability by receiving payments over multiple tax years. However, you face the structural risk of depreciation recapture, which must be fully recognized as ordinary income in the year of sale regardless of how much cash you actually receive. This creates an immediate cash flow drain if the deal is not structured properly. To mitigate this, you must negotiate a cash down payment at closing that is large enough to cover your entire tax liability for the year of the sale, including all recapture taxes. Do not accept a low down payment that leaves you writing a check to the government before you have the cash in hand. To monitor the buyer's ongoing solvency and protect your remaining installment payments, you must build operational safeguards directly into the purchase agreement. Require the buyer to provide quarterly financial statements and access to their key operational metrics, identical to the measurables you tracked on your EOS Scorecard. If their metrics dip below agreed-upon thresholds, it triggers an operational warning. Your agreement should also state that any material changes to the leadership team or deviations from the core focus defined in your V/TO will trigger an immediate acceleration clause, making the entire outstanding balance due. This ensures you do not sit by helplessly while a weak management team runs down your legacy and defaults on your note.