How does Section 453 address the sale of depreciable property between related parties?

Question

Tyler Smith · Accepted Answer

When depreciable property is sold between related parties, Section 453 imposes specific anti-abuse rules that severely restrict the use of the installment method. Under Section 453(g), if depreciable property is sold to a related person and the sale could otherwise qualify as an installment sale, all payments to be received are treated as received in the year of sale. In other words, the seller typically cannot defer the gain. The definition of a 'related person' for this purpose is broad and generally includes a person and all entities that are 80% owned, directly or indirectly, by that person, or by family members, among other relationships.

The primary intent of this rule is to prevent related parties from using an installment sale to achieve a tax advantage where the buyer gets a stepped-up basis in the depreciable property immediately (allowing for higher depreciation deductions) while the seller defers the recognition of gain. Without this rule, related parties could, in effect, create a 'depreciation holiday' for the group. There are limited exceptions, such as when the taxpayer can establish to the satisfaction of the IRS that the avoidance of federal income tax was not one of the principal purposes of the sale. However, proving this can be challenging. Therefore, when contemplating the sale of depreciable assets to a related party, it's crucial to assume that Section 453 deferral will not be available and plan accordingly for immediate gain recognition.