How does Section 453 impact the basis of assets acquired through an installment sale for the buyer?

Question

Tyler Smith · Accepted Answer

For the buyer in a Section 453 installment sale, the tax basis of the acquired assets is generally established at the time of purchase, not as payments are made. This means the buyer can typically begin depreciating or amortizing the full cost of the acquired assets immediately, even though they are paying the seller over time. The purchase price, which forms the basis, includes both the cash down payment and the face value of the installment note. This is a crucial distinction from the seller's perspective, where gain recognition is deferred.

For example, if a business is sold for $5 million with $1 million down and a $4 million installment note, the buyer's basis in the acquired assets is $5 million from the outset. This allows the buyer to take tax deductions based on the full $5 million amount from day one, assuming the assets are depreciable or amortizable. This accelerated basis recovery can be a significant advantage for buyers, improving their cash flow and reducing their taxable income in the early years post-acquisition. It's important for buyers to ensure proper allocation of the purchase price among various assets, such as inventory, equipment, real estate, and goodwill, to optimize their depreciation and amortization schedules. This allocation should be clearly defined in the purchase agreement and often requires an appraisal.