Selling a Hotel: How the Sale Is Taxed and What Moves Your Net

A hotel sale is three sales under one purchase agreement

A hotel sale bundles real estate, a building full of personal property and an operating business with a brand flag. Each piece is taxed by its own rules, so the first question is how the price gets split. Under IRC 1060, buyer and seller allocate the price with the residual method across asset classes and both report it on Form 8594. Goodwill and going-concern value take whatever is left after the hard assets are valued.

Three buckets matter for a hotel:

• Land and building. A hotel is nonresidential real property with a 39-year life, because the residential rental definition in IRC 168(e)(2)(A)(ii)(I) excludes a hotel or motel where more than half the units are used on a transient basis.
• Furniture, fixtures and equipment (FF&E). Beds, case goods, laundry and kitchen equipment. This is Section 1245 property.
• Business value. The franchise license, booking history, website and trade name, assembled workforce, and goodwill. Usually Section 1231 or capital gain, except where intangibles were bought and amortized.

See how allocation fights usually go on our purchase price allocation analysis.

FF&E: the slice taxed at ordinary rates

Every dollar of price assigned to FF&E, up to the depreciation you claimed on it, is ordinary income under IRC 1245, taxed at up to 37% (IRC 1(j), rate structure made permanent by P.L. 119-21 for 2026). Hotel furnishings depreciate fast: assets used in personal services fall in asset class 57.0 with a 5-year recovery period (IRS Publication 946, 2025 edition), and 100% bonus depreciation is permanent for property acquired after January 19, 2025 (P.L. 119-21 section 70301). After one renovation cycle, the tax basis in your soft goods is often close to zero.

That sets up the classic tension. The buyer wants a high FF&E number so it can write it off quickly. You want a modest, defensible number backed by an appraisal, because each extra dollar there is ordinary income for you instead of 20% gain. If you sell on terms, the recapture is still taxed in the year of sale even if most of the cash arrives later (IRC 453(i)). Our depreciation recapture analysis walks through the math.

The building: 39-year property and the 25% layer

Straight-line depreciation on the building is not ordinary recapture, but the gain up to that depreciation is unrecaptured Section 1250 gain, taxed at a maximum 25% (IRC 1(h)(1)(E), 2026). A full-service hotel held for 15 years can carry millions in this layer. In the first example it is $2,600,000 of the gain.

If you ran a cost segregation study, part of what looks like building was reclassified to 5, 7 or 15-year property. Those components are generally Section 1245 property and come back at ordinary rates, not 25%. More on that trade-off in our cost segregation before a sale analysis.

The PIP: how the brand's demands move your price and your tax

Most flagged hotels change hands only if the brand approves the buyer, and approval usually comes with a property improvement plan (PIP): new carpet, case goods, bathrooms, signage, technology. Buyers price the PIP into their offer, dollar for dollar or close to it. That gives you two ways to pay for it, and they land in different tax buckets:

• Give the buyer a price credit. The lower price reduces your amount realized. Where the reduction lands in the allocation matters: a credit taken against FF&E value cuts ordinary-rate dollars; one taken against goodwill cuts gain taxed at no more than 20% (Rev. Proc. 2025-32, 2026).
• Do the PIP yourself before closing. The spend becomes basis. If you claim bonus depreciation on the new FF&E and sell months later, that deduction comes straight back as Section 1245 recapture. You swapped a deduction for income at the same rate and took on the renovation yourself.

Franchise agreements: termination, transfer and what they are for tax

The brand either approves a transfer of your agreement or terminates it and signs the buyer to a new one. Early termination can trigger liquidated damages owed by you; how that payment is treated depends on the agreement's wording, so have your CPA classify it before the settlement statement is final.

If you bought the hotel with an existing license and amortized part of the price as a franchise intangible, that amortization is recaptured as ordinary income when you sell, because IRC 197(f)(7) treats amortizable intangibles as Section 1245 property. Brand-related value you built yourself is usually goodwill taxed as long-term gain.

1031 exchange: only the real property defers

Since 2018, like-kind exchanges apply only to real property (IRC 1031(a)(1)). The regulations list hotels and motels as buildings, so the land and building qualify. Two pieces do not:

• FF&E is personal property. The 15% incidental-property rule in Treas. Reg. 1.1031(k)-1(g)(7)(iii) only keeps your qualified intermediary safe harbor intact when furniture rides along with the building. It does not make the furniture like-kind; its value is still taxed.
• The brand and the business. Treas. Reg. 1.1031(a)-3(a)(5)(ii) says a license or permit to operate a business on real property is not real property. A franchise license and a liquor license stay on the taxable side, along with goodwill.

In the second example, putting the real estate into a 1031 drops the tax caused by the sale to $545,583, still a real bill because the FF&E recapture and business value are taxed now. The difference from the cash sale is $1,471,300, deferred rather than erased. Pair the exchange with a Section 453 installment sale on the non-real-estate piece, or compare the routes in 1031 vs installment sale and 1031 boot.

Who runs the hotel decides whether the 3.8% applies

A hotel is not a rental activity under the passive loss rules when the average guest stay is seven days or less (Treas. Reg. 1.469-1T(e)(3)(ii)(A)). It is an operating business, so the net investment income tax turns on participation. If you materially participate, gain on the business assets is outside the 3.8% tax (IRC 1411(c)(1)(A)(iii), thresholds fixed in statute). If a third-party management company runs the property and you mostly sign checks, the gain is passive and the 3.8% applies.

Compare the first and third examples: the same Arizona sale costs $2,016,883 for the passive owner and $1,762,283 for the owner-operator, a gap of $254,600. Participation is a facts test over years, not something to arrange in the sale year. More on this layer in our NIIT on a sale analysis.

Asset sale or entity sale, and getting paid over time

Most hotels sit in an LLC taxed as a partnership. Selling the membership interests instead of the assets does not escape the ordinary slice: the FF&E recapture is a hot asset under IRC 751 and is still ordinary income to you. The differences are transfer taxes, approvals and contracts. Buyers of interests usually ask for a Section 754 election so they get a stepped-up basis, which narrows the gap.

If you carry a note, keep it secured by a first-position deed of trust on the hotel and a UCC lien on the FF&E, with a personal guarantee from the buyer's principals. Our seller financing analysis covers the terms that protect you, and the commercial property gains page covers the real estate layer in more depth. To see your hotel's allocation, 1031 and note options side by side, get the Big Sale Tax Analysis.

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