Selling Business Assets Tax: Everything You Need to Know
The selling business assets tax is a fee you must pay on any assets you sell during the year.3 min read updated on February 01, 2023
The selling business assets tax is a fee you must pay on any assets you sell during the year.
Figuring out the exact figure you'll need to pay taxes on is far easier than determining what the taxes will actually be. All you have to do is subtract your cost for the asset from the amount you sold it for.
If the number you get is positive, this is a capital gain. This means you will have to pay capital gains tax on this amount. If the number you come up with is negative, this is a capital loss and means you have lost money on your investment.
The different types of capital gains and losses include:
- Short-term capital gains.
- Long-term capital gains.
- Short-term capital losses.
- Long-term capital losses.
- 28 percent gain (which relates to selling collectibles).
- Section 1250 depreciation recapture.
- Unrecaptured 1250 gain.
Each of these losses and gains is taxed differently, meaning your business assets tax could vary for each sale. To best calculate the amount you'll need to pay, you'll first have to determine what kind of asset you're selling as well as what kind of entity holds the asset. For example, any asset held by a C corporation is taxed at the normal rates, regardless of the kind of property. Other holding entities add in complicated layers of gain.
Defining Your Assets
While there are many different kinds of assets you can sell, they typically fall into three main categories:
- Section 1231 property — Assets held for more than one year used in your business.
- Section 1245 property — Any personal property that can depreciate, including both tangible and intangible items. This also includes real property, such as a storage tank inside of a building (but not the building itself).
- Section 1250 property — Any real property not covered in Section 1245, such as entire buildings and their structural components.
Defining which category your assets fall under can be tricky, so it's often best to contact an attorney or accountant for assistance.
Section 1231 Property
Any gains you get when selling Section 1231 property are classified as long-term capital gains. This means they will be taxed at the maximum rate of 15 percent (as of December 31, 2012).
If you have a loss when selling Section 1231 property, it's considered an ordinary loss. This means you can reduce your income on your individual taxpayer return to lower your tax burden. However, you will not be able to utilize capital loss limitations.
Additionally, Section 1231 has a recapture rule that lets you pay only ordinary income taxes on your asset instead of the 15 percent rate. You qualify if you sell the asset at a gain but deducted losses from the asset any time in the past five years.
Section 1245 Property
When you sell Section 1245 property, you have the chance to recapture your gain as ordinary income if you previously had depreciation deductions. However, you can only classify the amount up to the previously taken depreciation as ordinary income. Anything that goes over this amount will follow the same rules as a Section 1231 gain.
If you sell your asset at a loss, these rules do not apply. Instead, you'll follow the rules for a Section 1231 loss and deduct the amount as an ordinary loss on income, reducing your overall income burden.
Section 1250 Property
Selling Section 1250 property means you need to consider two main factors: depreciation recapture and unrecaptured gain.
Any property that's been created after 1986 is not eligible for long-term capital gain depreciation recapture.
However, if you have property that was created before 1987, you may be eligible for depreciation recapture as long as you used an accelerated depreciation method. If you used a straight-line depreciation method, you won't be able to utilize depreciation recapture.
If you qualify for depreciation recapture, the gain on the sale of your property will be taxed as ordinary income as long as your accelerated depreciation method exceeded what would have been the total if you used the straight-line depreciation method.
Anything that exceeds the amount counted as ordinary income but doesn't exceed the total depreciation is counted as unrecaptured Section 1250 gain. This amount will be taxed at a rate of 25 percent.
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