One of the biggest mistakes sellers make is waiting until after a transaction closes to discuss the tax impact with their CPA. By then, many planning opportunities are gone. If you’re considering selling a business, rental property, or other significant asset, understanding the tax consequences before negotiations begin can help you avoid costly surprises.
Key Tax Considerations
Capital Gains Tax
Long-term capital gains are taxed at preferential rates of 0%, 15%, or 20%, depending on your total taxable income. Because the gain is added to your other income, a large sale can push you into a higher capital gains bracket. For example, a substantial gain may result in tens of thousands of dollars in additional tax making, timing, deal structure, and installment planning important planning tools.
Depreciation Recapture
Depreciation deductions reduce taxable income while you own an asset, but the IRS generally recaptures those benefits when you sell. For rental real estate, depreciation recapture is taxed as unrecaptured Section 1250 gain at a maximum rate of 25%. For business equipment and other personal property, Section 1245 recapture is taxed as ordinary income, potentially up to 37%.
Even if a property sells for less than its original purchase price, depreciation may have lowered its adjusted basis enough to create taxable gain. This is why maintaining basis records and understanding an asset depreciation history is critical before a sale.
Net Investment Income Tax (NIIT)
Higher-income taxpayers may also owe the 3.8% Net Investment Income Tax in addition to capital gains tax. Whether NIIT applies can depend on factors such as ownership structure and your level of participation in the business or property.
Estimated Tax Payments
Large gains can create quarterly estimated tax obligations. If payments are not made timely, underpayment penalties may apply—even if the full tax bill is paid by the filing deadline.
Installment Sale Planning
An installment sale election allows gain recognition to be spread over multiple years as payments are received, rather than recognizing the entire gain in the year of sales. This strategy can help manage tax brackets and reduce exposure to NIIT.
However, depreciation recapture generally must be reported in the year of sale, even when installment reporting is elected, making advance analysis essential.
Why Basis Documentation Matters
Taxable gain is calculated using the selling price minus your adjusted tax basis. Basis generally includes the original purchase price plus capital improvements and minus accumulated depreciation. Missing documentation can increase taxable gain and create challenges during an IRS examination.
Entity Structure Can Change the Tax Outcome
How an asset is owned significantly affects taxation. Examples include:
- C-corporation stock sales vs. asset sales
- Potential double taxation on C-corporation asset sales
- Built-in gains tax for certain S-corporations that recently converted from C-Corp status
- Basis and allocation issues involving partnerships and LLCs
Because buyers and sellers often prefer different transaction structures, understanding the tax consequences in advance helps you negotiate from an informed position.
Timing Matters
The closing date can affect tax brackets, NIIT exposure, installment sale opportunities, and estimated tax requirements. Moving a transaction before or after December 31 may significantly alter the tax result.
The Value of Pre-Transaction Planning
Tax planning after a sale is often damage control. Planning before a transaction is strategic and can save tens of thousands of dollars, or more. If you’re considering a sale, please reach out to your Saville team member so you fully understand the tax implications and planning opportunities before the deal is finalized.