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 generally has no direct impact on the basis or depreciation schedule of the acquired asset.

Buyer's Cost Basis

The buyer typically takes a cost basis in the asset equal to the full purchase price. This remains true regardless of how or when the seller receives the payments.

For both accounting and tax purposes, the buyer will:

• Record the asset at its full acquisition cost on their books.
• Begin depreciating it according to standard IRS rules and schedules applicable to that specific asset class.

Example: Commercial Real Estate

Consider an 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.
• Their ability to begin claiming depreciation deductions based on that full cost.

Distinction Between Buyer and Seller

This is a critical distinction because 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 constitutes a bona fide transaction.

Buyers should nonetheless ensure that the asset's purchase price is appropriately allocated among depreciable and non-depreciable components (e.g., land vs. building) to maximize tax benefits. This allocation is crucial for determining the correct [depreciation amounts](/qa/what-is-the-interaction-of-section-453-with-macrs-depreciation-recapture-for-real-estate).

For more insights into the buyer's considerations in such transactions, refer to [what are the considerations for a buyer when a seller uses Section 453](/qa/what-are-the-considerations-for-a-buyer-when-a-seller-uses-section-453). Understanding the [imputed interest rule under Section 453](/qa/what-is-the-treatment-of-imputed-interest-under-section-453-installment-sales) is also important for both parties.

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