Tax Considerations When Selling an Inn
Cash at Closing
If all of the cash due a Seller is paid at closing, then the entire tax liability will be due for that tax year. It has the highest tax liability potential because all gain is recognized in one year.
Payments must occur in at least two tax years. The gross profit percentage is computed and applied to the principle received each year (including down payment in the year of sale). The tax is computed as either short-term or long-term capital gain. Recent legislation makes this available to accrual taxpayers as well as cash basis taxpayers.
Lease with Option to Buy
A method that would allow the Seller to slowly ease out of the business and move the recognition of gain to a later tax year. Lease payments are taxed as ordinary income. Part of the payment can be held in escrow to be applied against the purchase price when the sale takes place. The overall gain is not recognized until the sale is complete.
Allocation of Assets
Land & Building: Determined by appraisal.
Furniture, Fixtures and Equipment: Determined by appraisal or an agreement between the Buyer and Seller.
Business Value: (Goodwill) Can use industry guidelines or valuation by a qualified appraiser.
Short-term gain is property held less than 12 months.
Long-term gain is held more than 12 months.
Gain is the difference between original cost plus improvements, plus closing costs, less accumulated depreciation. This is the adjusted basis. Adjusted basis subtracted from the sale price is the gain.
Short-term gain is taxed at ordinary income tax rates. Long-term gain is normally at a maximum 20% rate of the gain. Some assets may require recapture of depreciation. The potential tax liability should be determined before the sales contract is signed.
Innkeeper resources: Tax Considerations in Purchase/Sale of a Bed and Breakfast. More about our services available at www.lodgingresources.com.