What are the limitations of Section 453 when selling depreciable property to a related person, and how does it impact gain deferral?

Question

Tyler Smith · Accepted Answer

Section 453 imposes significant limitations when a taxpayer sells depreciable property to a related person. The primary purpose of these rules is to prevent taxpayers from using installment sales to avoid tax while a related party depreciates the property on an accelerated basis. Under Section 453(g), if depreciable property is sold to a related person, the installment method generally does *not* apply.

Instead, all payments to be received are treated as received in the year of the disposition. This means that the entire gain on the sale is recognized in the year of the sale, effectively denying any deferral benefit. The definition of 'related person' for this purpose is broad and includes, but is not limited to, an individual and a corporation in which the individual directly or indirectly owns more than 50% of the stock; two corporations that are members of the same controlled group; and a partnership and a person owning more than 50% of the capital or profits interest in the partnership. There's a limited exception if it can be established to the satisfaction of the IRS that the disposition did not have as one of its principal purposes the avoidance of federal income tax. However, this exception is difficult to meet. Therefore, taxpayers contemplating such sales must be acutely aware of these rules to avoid unintended immediate tax recognition.