Question

A business for sale is being listed for $500,000.

Please for each the buyer and seller, list the most preferable and realistic ways this value would be split upon the various asset classifications listed by the IRS for a total value of $500k from both the perspective of each the buyer and seller.

Please explain why each the buyer and seller would prefer to have the values classified as such.

EXHIBIT 1 Classification of Certain Assets Under IRC Section 1060 (Form 8594) Class I: Cash (checking and savings accounts) Class II: Certificate of deposit and marketable securities Class III: Accounts receivable Class IV: Inventory (valued pursuant to Revenue Procedure 2003-51) Class V: Tangible realty and personalty Class VI: Certain IRC section 197 intangibles, such as customer lists, trademarks, franchises, and any portion of the price allocated to a covenant not to compete Class VII: Goodwill, along with any asset not categorized within one of the other six classes

Answer 1

According to the IRS, most home sellers do not incur capital gains due to the $250,000 and $500,000 exclusion for single and married couples. This makes sense since the median home price is roughly $210,000 in 2018, and the average holding period is nine years.

There are three tests you must meet in order to treat the gain from the sale of your main home as tax-free up to $250,000 / $500,000:

• Ownership: You must have owned the home for at least two years during the five years prior to the date of your sale. It doesn’t have to be continuous, nor does it have to be the two years immediately preceding the sale.