Most owners judge an offer by the headline purchase price in their letter of intent (LOI). However, our experienced team of advisors sees a sale as a move toward building a portfolio, and that includes more than the price.
What you pay in taxes when you sell a business comes down to five decisions: whether you sell assets or stock, how the price is allocated, how much depreciation you recapture, how the remaining gain is taxed, and how you take your proceeds.
Before moving from intent to closing, understand the terms that decide how much you keep for the next property. Below, we walk through each one and how it sets up your next acquisition.
What’s the Difference Between Asset Sale vs Stock Sale Taxes?
What is a buyer purchasing from you?
- Asset sale: the buyer acquires the hotel’s individual assets, like land, building, furniture, fixtures, equipment, and goodwill.
- Stock sale: the buyer purchases your ownership interest in the entity that holds those assets, and the hotel stays inside that company.
Buyers usually prefer an asset sale because they get a new tax basis and can restart depreciation. Sellers, especially C corporations, often prefer a stock sale because the gain is generally taxed once, as capital gain.
Another impact on tax is your ownership type:
- C corporation: an asset sale can create two layers of tax, once at the corporate level and again upon distribution of the proceeds to shareholders.
- S corps, Partnerships, and LLCs taxed as either: Gains generally flow through to your personal return, though the tax rate depends on the character of each underlying asset.
If your S corporation converted from a C corporation within the last five years, a built-in gains tax may also apply.
Why Should You Plan the Purchase Price Allocation Early?
During an asset transaction, the total purchase price is allocated across seven IRS asset classes using Form 8594.
- Purchase price allocation: How the total sale price is divided among the buyer’s acquired assets.
When the purchase agreement sets the allocation, both parties are generally bound by it and should report it consistently. Buyers and sellers may have different tax interests in mind, making purchase price allocation a core negotiation factor:
- Buyer preference: Buyers often push for short-life asset value, like FF&E, because they generally can depreciate it quickly and produce faster deductions.
- Seller preference: Advocates for more value on land and owner-created goodwill. While they are typically taxed at lower capital gains rates than higher ordinary income, depending on your entity type, the tax implications may change.
Settle the allocation in the purchase agreement, not after closing. Buyers will also test your numbers in diligence, so consider running your own quality of earnings review before going to market.
How to Run Your Depreciation Recapture Numbers
Hotel owners who utilized accelerated depreciation, Section 179, or a cost segregation study on a recent property improvement plan (PIP) or renovation might see a significant alteration to their tax exposure.
When you sell, the IRS requires you to “pay back” a portion of your tax savings:
- Depreciation recapture: the tax code treats this part of your gain as ordinary income or as unrecaptured Section 1250.
Hotel assets fall into two groups:
- FF&E and other personal property (Section 1245): Depreciation claimed on personal property is recaptured at ordinary income rates of up to 37%. That includes building components reclassified in a cost segregation study.
- The building (Section 1250): Gain tied to straight-line depreciation on real property is taxed at a maximum rate of 25%.
Accelerated depreciation moves deductions into earlier years, and that cash has value. But if you completed a PIP in the last few years, your FF&E may have a low tax basis and meaningful market value.
Let’s look at an example. Say your past PIP included $1.2 million in FF&E that was fully written off, and the purchase agreement allocates $1.2 million to FF&E at sale. That entire amount may be taxed as ordinary income in the year of sale.
For more information on how first-year tax write-offs work prior to sale, read our guide on bonus depreciation and Section 179 for independent hotel owners.
Estimate Capital Gains Tax on What Remains
The remaining gain on assets held for more than one year is generally treated as long-term capital gain.
For 2026, those rates remain 0%, 15%, and 20%, based on overall taxable income thresholds. A hotel sale can push a single year of income well past those thresholds. Depending on your situation, you may also owe an additional 3.8% Net Investment Income Tax (NIIT), which could bring the top end of the long-term gains rate to 23.8%.
Whether that surtax applies to your sale depends largely on whether you materially participate in running the hotel. Please consult with your advisor as to how your situation may be impacted by this tax.
How Will You Get Paid and Where Will That Money Go?
If your goal is to buy more properties, how you take your proceeds matters as much as the price.
Section 1031 Exchanges: Defer the portion of capital gains tax on real property by reinvesting in qualifying replacement property. But you must identify the replacement property within 45 days of transferring the property. A few rules shape an exchange:
- FF&E isn’t real property, so its recapture is taxed in the year of sale, even in an exchange.
- You must close within 180 days. The original identification only gives the 45-day window.
- A qualified intermediary must hold the funds.
- Cash received, or debt paid off without being replaced, is taxable boot.
- Stock or partnership interest sales don’t qualify
Installment Sales (Seller Financing): Defer recognition of capital gains by spreading payments over multiple years. A seller of depreciable property must report depreciation recapture as ordinary income in the year of sale, even if no installment payment arrives that year.
Installment balances over $5 million can trigger an interest charge on the deferred tax, and you take on the buyer’s credit risk. This can also tie up cash you planned to use for your next hotel purchase, so weigh both effects.
On a gain the size of most hotel sales, timing matters the most for cash flow. A closing in early January rather than December may not change your bracket, but it can push most of the tax bill out by roughly a year.
Sell With Your Next Property in Mind
Every decision in this sale is also a decision about your next one. Proper tax planning can help you retain enough liquidity for your next portfolio expansion.
Your Pre-Sale Tax Checklist:
- Determine whether the buyer wants an asset sale or a stock sale, and review how your entity type affects the tax.
- Negotiate the purchase price allocation to help manage ordinary income exposure.
- Choose how you get paid, whether that’s a cash sale, installment sale, or 1031 exchange. Proactive 1031 planning can help meet the 45-day and 180-day deadlines and avoidable tax boot.
- Gather your complete tax and cost records to help create a clear starting basis for future assets.
- Clean operating metrics, including ADR and RevPAR, to help support your asking price during buyer diligence.
That leads to your first question: “What does this sale put me in position to buy next?”
MBE CPAs helps hotel owners with the tax planning behind a sale or acquisition, from structure and price allocation to 1031 timing. We can work alongside your current CPA as you plan your next property.
Considering a hotel sale or acquisition?