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MequonCPA, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 2342
Experience:  CPA, Over 30 yrs experience w/individuals and small businesses. Masters in Tax.
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I sold my business (a gym), with an owner financed. Verylittle

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I sold my business (a gym), with an owner financed. Verylittle money was exchanged at closing. My accountant is saying that the equipment was being depreciated over a 7 year macrs, and for what the agreed price of sale,and what the equipment was depreciated at over 4 years, I am having to pay taxes on that difference. My Question:
Is there provisions in the tax law to only be taxed on what he is paying me, and not for the full amount ? My concern is if he defaults on the loan, I get the gym back and will possibly be taxed twice upon a future re-sale. Also, can the business side be considered part of this price along with inventory, it is a gym that is in full operation at the time of sale that has clientele.

Hi and welcome to JustAnswer:


Your accountant is correct. In the year of the sale you must report as income the amount of depreciation recapture on the equipment. This is true regardless of whether the sale was paid in full or no payments were received. Details in Publication 537.


You will not be taxed twice. See page 12 of IRS Publication 537. It explains the process if personal property sold on an installment sate is repossessed. (Link below).



Customer: replied 6 years ago.
O.K. then, is it possible to keep the equipment at its depreciated value and have credit for the difference that it sold for on the business side since it was in full operation with a clientele base, apparel, supplements,etc... I believe this is reffered to as goodwill ?
The equipment must be sold at its fair market value not its depreciated basis. If the selling price is higher then the fair market value of the equipment the difference is classified as goodwill.
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Customer: replied 6 years ago.
O.K. if the fair market value is now below the depreciated value, due to the economy, several gyms have sold out and they are selling their equipment at 50 and as much as 75% below market value. If I was to liquidate that equipment today, I would be fortunate to get the depreciated value comparing it to the fair market value. So please explain goodwill, will this help reduce or remove the tax that I am said to owe?

Hi Zeke -


Only the ordinary income must be reported in the year of sale (depreciation recapture). The amount that is allocated to goodwill will be reported on the installment basis and will be taxed at long term capital gains tax rates, currently 15% federal.

Customer: replied 6 years ago.
<p>It's difficult to understand that the IRS is wanting tax money up front on money that has not been fully paid because of the owner financing. I can't believe they don't have provisions in place for this type of arrangement. I would think that the money that is received monthly and is paid to an escrow account for the owner financed loan, (and with that money, I pay my loan at the bank) would be the taxed amount on an annual basis, not all at once, but over the life of the loan. So.... I guess I need to know my options for paying the IRS back? .... I do want to thank you for your time and comments concerning this matter....Greg </p>

Hi Greg -


The ordinary income portion of the gain will be reported on the return in the year of the sale. You will be taxed on that portion in that year. If you are unable to fully pay the tax, you should be able to set up an installment payment plan with the IRS. Late payment penalties and interest continue to accrue on the unpaid balance while you make the payments.


Did you contact your accountant before you structured the deal?

Customer: replied 6 years ago.
O.K. I appreciate it. And no I did not contact my accountant. The contract is set up properly, but the tax side of it was not. Since the thought was I still have a vested interest in the business, and technically it is still mine until it's paid off, (that is how our banks operate when money is borrowed, and I am his bank in this contract) that I would be paying on the interest as I mentioned above. My bank is very surprised with this as well. Again....Thank you for your time.

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