Selling a Restaurant: What Gets Taxed and How

Why the allocation is the whole game

Most restaurant buyers purchase assets, not the owner's company, because they want a fresh entity without old payroll, sales tax or liability history. In an asset sale the price is divided among classes under the residual method and both sides report it on Form 8594 (IRC 1060). Buyers want price on equipment and improvements they can write off quickly. Sellers want it on goodwill, which is capital gain.

Example 2 keeps the price and the total gain the same and simply moves $200,000 from goodwill to equipment. Tax rises from $333,893 to $358,438. California taxes both kinds of gain at the same ordinary rates, so the state line stays $104,224 in both cases (FTB, capital gains page, 2026), and the whole difference is federal: up to 37% on ordinary income above $768,700 of joint taxable income versus 20% on capital gain above $613,700 (Rev. Proc. 2025-32, 2026). The purchase price allocation analysis covers how to negotiate the split and support it with appraisals.

FF&E and the build-out you already wrote off

Ranges, walk-ins, hoods, POS systems, tables and chairs are Section 1245 property. Most owners expensed them, so their sale price is ordinary income up to the depreciation taken (IRC 1245(a)). Because used kitchen equipment often sells for a fraction of its cost, the price allocated to it is frequently below original cost, and the recapture is limited to the actual gain on each item.

Interior build-out is usually qualified improvement property: interior improvements to nonresidential space placed in service after the building was (IRC 168(e)(6)), recovered over 15 years and eligible for bonus depreciation and Section 179 (IRC 168(e)(3)(E)(vii), 179(e)). How you wrote it off decides how it is taxed now. Amounts expensed under Section 179 are recaptured as ordinary income under Section 1245 even though the improvements are real property (IRC 1245(a)(3)(C)). If bonus depreciation was used instead, the excess over straight-line is ordinary under Section 1250(a), and the straight-line part is unrecaptured Section 1250 gain capped at 25% (IRC 1(h)(1)(E)). Recapture never exceeds the actual gain on an item, so a modest, supportable value on older build-out keeps that ordinary layer small.

The liquor license

A license granted by a government agency is a Section 197 intangible (IRC 197(d)(1)(D)). If you applied for the license and paid only state fees, almost all of its sale value is Section 1231 or capital gain. If you bought it from a prior owner, you amortized that cost over 15 years, and the amortization comes back as ordinary income before any capital gain (IRC 197(f)(7), 1245). Example 1 shows both pieces: $55,000 of recapture and $35,000 of gain.

Transfer rules are state law and set the timeline. In California the seller and buyer must open an escrow and deposit the full purchase price before the transfer application is filed, and the escrow pays bona fide creditors who file claims before the state approves the transfer, ahead of the seller (Cal. Bus. and Prof. Code 24074, 2026). In states with a fixed number of licenses per county, the license can be worth more than the equipment, which makes its allocation line just as important as goodwill.

Lease assignment and the real estate question

Most restaurants lease. The lease is often the asset the buyer wants most, and assignment almost always needs landlord consent. Landlords may ask for a new personal guarantee from the buyer, a larger deposit or a longer term, and some leases let the landlord take a share of any amount paid for the lease itself. Settle those terms before the price is final, because a landlord's refusal ends the deal regardless of the tax plan.

If you own the building, you can sell it, exchange it under Section 1031 (see the 1031 exchange analysis), or keep it and lease it to the buyer. Restaurant equipment and goodwill cannot be exchanged since 2018; only the real estate can (IRC 1031(a)(1)).

Franchise vs independent

Selling a franchised location adds the franchisor to the deal. Expect approval of the buyer, a transfer fee, a new franchise agreement, and often a required remodel that the buyer will price against you. The value you sell is your franchise rights and location goodwill; because you keep no continuing interest after the sale, the special rule that turns a franchise transfer into ordinary income does not apply to you as the selling franchisee (IRC 1253(a)). See selling a franchise for franchise-specific details.

Inventory, gift cards and sales tax successor liability

Food, beverage and paper inventory is ordinary income property (IRC 1221(a)(1)) and usually changes hands at cost on a count taken at closing, so it adds little gain. Outstanding gift cards should be handled in the purchase agreement so the buyer honors them and the price reflects the liability.

Sales tax is the trap. In California, a buyer must withhold enough of the price to cover the seller's unpaid sales tax until the seller produces a receipt or tax clearance from the state; a buyer who does not withhold becomes personally liable up to the purchase price (Cal. Rev. and Tax. Code 6811, 6812). The CDTFA also expects your final return to report sales of fixtures and equipment. Buyers will hold back part of the price until the clearance arrives, so request it early.

Seller notes, SBA buyers and timing

Many restaurant buyers use an SBA 7(a) loan, and lenders often want the seller to carry part of the price. A Section 453 installment note spreads the goodwill and liquor license gain over the years you are paid, but all recapture is taxed in the closing year (IRC 453(i)). If you carry paper, secure it with a lien on the equipment and license where state law allows, a personal guarantee, and default terms tied to the lease. The installment sale of a business and seller financing pages cover the terms. To see your allocation and note options modeled, get the Big Sale Tax Analysis.

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