Understanding the Tax Impact of Selling Inventory, Intangibles, and Real Estate in a Business Sale

As a financial planner who specializes in helping business owners navigate complex financial transitions, I’ve seen firsthand how the sale of property within a business — whether it’s inventory, real estate, or intangible assets like goodwill — can have significant ripple effects across your entire financial plan.

It’s not just about the price tag. It’s about how the deal is structured, what’s being sold, how the IRS classifies those assets, and — critically — how the sale aligns with the rest of your financial life.

In my experience, having a deep understanding of the tax implications allows business owners to make smarter decisions about retirement, estate planning, reinvestment strategies, and more. That’s why I often emphasize the importance of having your CPA and financial planner on the same page during a business transition.

I’ve helped clients map out the sale of business property in detail — breaking down asset classes, installment sales, and seller notes — so they walk away with not just a completed sale, but financial clarity about what comes next.

Here’s how taxes work across three major categories of business property — and what you need to know to structure a tax-smart sale.

1. How Inventory Is Taxed

Inventory is not a capital asset — and it's never eligible for capital gains treatment. Instead, when you sell inventory (either directly or as part of a business sale), any gain is taxed as ordinary income.

Example:

• You originally purchased inventory for $60,000.

• You sell it for $100,000.

• Your taxable income is $40,000 — taxed at your ordinary income tax rate, not capital gains rates.

  
  

This applies even if the buyer is paying you over time using a seller note. The gain from inventory is fully taxable in the year of sale, even if you haven’t received all the cash yet.

In short: Inventory = ordinary income, taxed immediately.

2. Selling Depreciated Intangible Assets (Like Goodwill or Customer Lists)

When you sell purchased intangible assets (like goodwill, trademarks, or customer lists), they’re usually treated as capital assets — and any gain is capital gain if held for more than a year.

The good news: even if you've amortized these assets under Section 197 over 15 years, you don't have to "recapture" that amortization as ordinary income. That’s right — Section 197 amortization doesn’t trigger depreciation recapture.

Example:

• You paid $150,000 for goodwill and amortized $50,000.

• Your adjusted basis is $100,000.

• You sell it for $250,000.

• You report a $150,000 long-term capital gain, even though you previously deducted part of the asset.

  
  

If you're using a seller note, this gain can qualify for installment sale treatment under IRC §453 — meaning you pay tax as you receive principal payments over time.

Interest on the seller note, however, is always taxed as ordinary income in the year it’s received.

Note: Self-created intangibles, like a patent you developed yourself, may not qualify for capital gains or installment treatment. They’re often taxed as ordinary income.

3. Selling Real Estate — Especially Fully Depreciated Property

Selling real estate introduces another layer of tax complexity. Real estate used in a business (like a rental property or office building) is a Section 1231 asset, which gives you favorable capital gains treatment and the ability to deduct losses as ordinary losses.

But there’s a catch: if you’ve depreciated the property, the IRS wants to recapture part of those deductions when you sell. This is called Section 1250 unrecaptured gain, and it’s taxed at a maximum rate of 25% — more than capital gains, but less than ordinary income.

Fully Depreciated Example:

• Original building cost: $500,000

• Depreciation taken: $500,000 (fully depreciated)

• Sale price: $800,000

• Total gain: $800,000

  
  

Here’s how that’s taxed:

• $500,000 is Section 1250 gain — taxed at up to 25%, all due in the year of sale

• $300,000 is capital gain — eligible for installment sale treatment and taxed at 15% or 20%

  
  

If the sale includes land, that portion isn’t depreciated, so any gain on land is entirely capital gain.

4. Installment Sales & Seller Notes: Timing Matters

The installment method (IRC §453) lets you defer capital gains tax until you actually receive payments from the buyer. This can be especially valuable for tax planning.

But — and this is a big but — not everything qualifies for deferral:

Asset Type	Installment Eligible?	Tax Timing
Inventory	❌ No	Taxed immediately
Depreciation Recapture	❌ No	Taxed in year of sale
Goodwill (purchased)	✅ Yes	Taxed as payments received
Real Estate (capital gain portion)	✅ Yes	Taxed over time
Section 1250 Gain	❌ No	Taxed immediately
Land	✅ Yes	Taxed as payments received

Even if you structure a seller note with no payments for 15 years, the IRS may apply Original Issue Discount (OID) rules. This means you’ll still owe interest income taxes every year, even if no cash changes hands.

5. What Forms Are Involved?

When you sell a business with multiple asset types, you’ll likely need:

• Form 4797 – for reporting Section 1231 property and depreciation recapture

• Form 6252 – for installment sales

• Form 8949 & Schedule D – for capital gains

• Schedule B (Form 1040) – for interest income

You’ll also file Form 8594 with the buyer to agree on how the purchase price is allocated between asset classes — this allocation directly determines how each portion is taxed.

Final Thoughts: Structure = Strategy

Selling a business isn’t just a negotiation over price — it’s a negotiation over tax consequences. Two deals with the same sale price can lead to drastically different after-tax results, depending on how the assets are allocated and how payments are structured.

By understanding how inventory, intangibles, and real estate are taxed — and using installment sales strategically — you can often defer taxes, reduce your overall rate, and keep more of what you’ve built.

If you're a business owner thinking about selling, let’s make sure the tax structure of your deal aligns with your long-term plan. It’s not just about minimizing taxes — it’s about creating financial clarity for your next chapter.

About The Author

Marc Lowe is the Founder & President of In The Money Retirement Planning. He is a Certified Financial Planner and member of NAPFA National Association of Personal Financial Advisors, XY Planning Network & Fee-Only Network. He works with retirees and those approaching retirement. He has over a decade of experience helping these folks grow their net worth, organize their finances and build better lives for themselves and their families.

CEO & Founder of In The Money Retirement Planning

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