Our buyer wants an installment note spread over four years under Section 453, but our CPA warned us that depreciation recapture will trigger an immediate tax bill in year one on income we have not received yet. How do we negotiate the purchase price allocation to keep our cash flow intact?

Question

Tyler Smith · Accepted Answer

Section 453 explicitly bars the installment method for Section 1245 and 1250 depreciation recapture. If you have accelerated depreciation on equipment or internal tech, every dollar of recapture is recognized immediately in year one, even if you receive zero cash on the note. To fix this, you must control the purchase price allocation on IRS Form 8594.

Allocate the up-front cash payments specifically to fully depreciated assets subject to recapture, while assigning the deferred installment note to capital assets like goodwill and going-concern value that qualify for capital gains installment treatment. Alternatively, push for a minimum down payment at closing that specifically covers your immediate tax hit from ordinary recapture, state taxes, and advisory fees.

If the buyer pushes back on asset allocation because they want rapid depreciation write-offs, price the tax differential directly into the purchase price or demand a higher interest rate on the seller note. Run the numbers before signing the Letter of Intent. Once the LOI sets the allocation framework, clawing back that tax hit is nearly impossible.