How does Section 453 impact the basis and depreciation schedule of an acquired asset?

Question

Tyler Smith · Accepted Answer

From the buyer's perspective, an installment sale under Section 453 typically has no direct impact on the basis or depreciation schedule of the acquired asset. The buyer generally takes a cost basis in the asset equal to the full purchase price, regardless of how or when the seller receives the payments. For accounting and tax purposes, the buyer records the asset at its full acquisition cost on their books and begins depreciating it according to standard IRS rules and schedules pertinent to that asset class.

For example, if a buyer purchases a piece of commercial real estate for $5 million via an installment sale, their basis for depreciation purposes is $5 million from the date of acquisition, assuming no other adjustments. The fact that the seller is deferring their gain over several years through Section 453 does not alter the buyer's immediate basis or their ability to begin claiming depreciation deductions based on that full cost.

This is a critical distinction, as it highlights that Section 453 primarily affects the *seller's* tax treatment of the gain. The buyer's accounting for the asset's cost and subsequent depreciation is largely independent of the installment payment structure, provided the sale is a bona fide transaction. Buyers should still ensure that the asset's purchase price is allocated appropriately among depreciable and non-depreciable components (e.g., land vs. building) to maximize tax benefits.