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Capital gains tax on selling a business: the real number, and the five ways to change it

Roughly a third of a business sale goes to tax if nothing is planned. Most of that is decided by the structure of the deal, the allocation and the year of closing, all of which are set before you sign.

Free education from the Retirement Literacy Foundation, a 501(c)(3). Start with the free one-page Big Sale Tax Worksheet below and run your own numbers.

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Before you sign a letter of intent, put your own numbers on one page: basis, gain, the recapture slice, the 3.8% check, state tax, and whether the cash at closing covers the tax. Free from a 501(c)(3); nothing to buy.

Adjusted basis, step by step (improvements, depreciation, prior 1031)
Your gain split: 25% recapture slice vs. 0/15/20% capital gain, plus the 3.8% NIIT check
The tax-vs-cash check: does the cash at closing cover the tax?
Questions to take to your CPA (1031 boot, installment sales, DSTs)

The Retirement Literacy Foundation is a 501(c)(3) public charity (EIN 41-5062266). General education, not tax advice. We don’t sell financial products. Email only; unsubscribe any time.

The number

What a business sale actually costs in tax

A $2,000,000 sale of a business you started from nothing, sold as an asset sale by a married couple in California in 2026, before any planning:

Layer	Rate	On $2,000,000
Federal long-term capital gain (goodwill, most of the price)	20% above $613,700 of taxable income (15% below)	about $370,000
Net investment income tax	3.8% above $250,000 MAGI	about $70,000
Depreciation recapture on equipment (Section 1245)	ordinary income, up to 37%	depends on what was written off
California	9.3% to 13.3%, no capital gains rate	about $230,000
Total		about $670,000, a third of the sale

Texas or Florida seller: subtract the California line. Stock sale of a C corporation that qualifies for Section 1202: the federal line can drop to zero on the first $15 million (2025 law). Installment sale over 5 years: the federal line drops from 20% to 15% on most of it and the 3.8% often disappears, because each year's income stays under the thresholds.

The decisions that set the tax

Six things that are decided before you sign, not after

Asset sale or stock sale. Buyers want an asset sale (they get a fresh depreciation start). Sellers of C corporations want a stock sale (one layer of tax, possible QSBS exclusion). S corporations and LLCs usually land on an asset sale with a purchase price allocation, and that allocation is the whole tax story.
The allocation (Form 8594). Goodwill and going-concern value are capital gain. Equipment is recapture at ordinary rates. A non-compete is ordinary income. Consulting agreements are wages. Every dollar moved from goodwill to a covenant costs you the difference between 20% and 37%.
Cash at close, or spread. A Section 453 installment sale spreads the capital gain over the payment schedule. A structured installment sale does the same while the buyer pays in full at closing (an assignment company takes the buyer's cash and a life insurer pays you on schedule). Recapture is still taxed in year one.
The year. A December 31 closing lands the entire gain in a year that already has your salary in it. A January 2 closing lands it in a year you can design: retire, defer the bonus, make the charitable gift, harvest losses.
The earn-out. Contingent payments are usually installment income too. Get the tax treatment in the purchase agreement, not after.
Charity, if it is already part of your life. Giving a slice of the company to a charitable remainder trust before the sale removes that slice from the gain, pays you income for life and produces a deduction. It is irrevocable and it only makes sense if you would give anyway.

Practice owners (dental, medical, veterinary, CPA, law): the same rules apply, and the buyer is frequently a private-equity backed group that wants an asset purchase with a rollover equity piece. The rollover is usually tax-deferred; the cash is not. Have the allocation and the installment question settled before the letter of intent.

Free · one page · fill in your own numbers

Run your own numbers before you decide.

Adjusted basis, step by step (improvements, depreciation, prior 1031)
Your gain split: 25% recapture slice vs. 0/15/20% capital gain, plus the 3.8% NIIT check
The tax-vs-cash check: does the cash at closing cover the tax?
Questions to take to your CPA (1031 boot, installment sales, DSTs)

The Retirement Literacy Foundation is a 501(c)(3) public charity (EIN 41-5062266). General education, not tax advice. We don’t sell financial products. Email only; unsubscribe any time.

Audit trail

Sources and review

Reviewed for the Retirement Literacy Foundation, a 501(c)(3) education nonprofit. Prepared by Hans Goldstein, retirement educator; IRS Special Enrollment Examination Parts 1, 2 and 3 passed, enrollment pending; California licensed insurance professional #4273294. Informational only. Not tax, legal or investment advice. Every figure below cites its source so your CPA or attorney can check it.

Capital gains rates and brackets 2026: IRS Rev. Proc. 2025-32 (2026 inflation adjustments); IRC 1(h)
Net investment income tax 3.8%: IRC 1411; thresholds $200,000 single / $250,000 MFJ, not indexed
Depreciation recapture 25% (unrecaptured 1250) and 1245: IRC 1(h)(6), IRC 1245, IRC 1250; IRS Pub. 544
Section 121 home-sale exclusion: IRC 121; IRS Pub. 523; surviving-spouse 2-year rule IRC 121(b)(4)
1031 exchange rules: IRC 1031 (real property only after TCJA 2017); Treas. Reg. 1.1031(k)-1 (45/180 days, QI); IRS Form 8824
Delaware Statutory Trust as 1031 property: IRS Rev. Rul. 2004-86
Installment sales: IRC 453; IRS Pub. 537; Form 6252; IRC 453A interest charge above $5,000,000; IRC 453(k) excludes publicly traded stock
Monetized installment sales: IRS Dirty Dozen (IR-2023-54 and later); proposed regs REG-109348-22
QSBS: IRC 1202 as amended by P.L. 119-21 (2025): $15M cap, tiered holding periods for stock issued after July 4, 2025
Charitable remainder trusts: IRC 664; Treas. Reg. 1.664; pre-arranged sale doctrine (Rev. Rul. 78-197)
Step-up in basis: IRC 1014; community property IRC 1014(b)(6)
Inherited IRA 10-year rule: IRC 401(a)(9)(H) (SECURE Act); Treas. Reg. 1.401(a)(9) final regs 2024
California treatment: Cal. Rev. & Tax. Code 17041 (rates), 18031 (1031 conformity), FTB Form 3840 (out-of-state exchange tracking); Prop 19 (Cal. Const. art. XIII A, sec. 2.1)
Purchase price allocation: IRC 1060; IRS Form 8594

Figures are 2026 federal amounts and 2025 California rates unless stated. Examples are illustrative, rounded, and assume no other income; your numbers will differ. Last reviewed September 21, 2026.

Capital gains tax on selling a business: the real number, and the five ways to change it

Get the free Big Sale Tax Worksheet.

What a business sale actually costs in tax

Six things that are decided before you sign, not after

Run your own numbers before you decide.

Sources and review

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