Buying and Selling Hotels: 1031 Exchanges, Purchase Price Allocation, and Disposition Tax Planning

Every hotel transaction has two tax stories running at once: the buyer’s, about setting up a fresh basis and the fastest possible depreciation schedule, and the seller’s, about how much of the sale proceeds actually survive the tax bill. A like-kind exchange can defer that bill entirely for the seller, but only on the real property portion of a hotel sale, since personal property (the FF&E that makes a hotel operable) has not qualified for like-kind exchange treatment since the 2017 Tax Cuts and Jobs Act. On the buyer’s side, the price paid gets carved up across seven asset classes under IRC 1060, and that allocation determines how fast the buyer can depreciate what they just bought. Both sides interact at the closing table, and getting either one wrong produces a tax outcome neither party actually negotiated for.

Does a 1031 exchange still work for hotel real estate?

Yes, without qualification on the real estate side. Hotels are nonresidential real property, and nonresidential real property held for productive use in a trade or business or for investment has always been the core fact pattern IRC 1031 was written to cover. The 2017 TCJA narrowed 1031 to real property only, eliminating the personal property exchanges (equipment, vehicles, and similar assets) that used to be common in other industries, but it left real property exchanges, including hotel real estate, untouched. The OBBBA did not revisit 1031 at all, so the exchange remains available with no dollar cap on the deferred gain and no sunset date on the horizon.

What changed, and what still trips up sellers who last did a hotel exchange before 2018, is the scope of what counts as the real property being exchanged. Before TCJA, a hotel seller could sometimes roll FF&E and operating equipment into a broader like-kind structure alongside the real estate. That option is gone. A hotel 1031 exchange today covers land, the building, and land improvements, not the personal property that makes the hotel operable as a business, which is where purchase price allocation on both sides of the deal becomes unavoidable.

What happens to the FF&E when only real property qualifies?

Since FF&E no longer qualifies for 1031 treatment, sale proceeds attributable to furniture, fixtures, equipment, and other personal property are taxable in the year of sale regardless of whether the real estate portion is exchanged. On a full-service hotel, FF&E and other personal property, much of it already reclassified through a cost segregation study during ownership and much of it already fully depreciated through bonus depreciation, can represent 15% to 30% of the property’s fair market value at sale.

That means a seller planning a 1031 exchange needs to model two outcomes at once: the deferred gain on the real property portion, and the immediately taxable gain on the personal property portion, typically ordinary income to the extent of prior depreciation deductions (recapture under IRC 1245) with any remainder taxed as capital gain. A seller who assumes the entire sale price defers, without separating out the personal property allocation, will be surprised by a tax bill that shows up regardless of how the real estate side is structured. The fix is the same allocation discipline that applies on the buy side: allocate the price across asset classes before closing, informed by the seller’s existing depreciation schedules and any cost segregation study on file, so both portions are known quantities going into the exchange.

How do the 45-day and 180-day deadlines work in practice?

The exchange timeline is fixed by statute and does not bend for hotel-specific complications, which is exactly why hotel exchanges fail at a higher rate than exchanges of simpler property types. The seller has 45 calendar days from the closing of the relinquished property to identify replacement property in writing to the qualified intermediary, and 180 calendar days from that same closing date to complete the acquisition. Both deadlines run concurrently, not sequentially, and neither extends for weekends, holidays, financing delays, or the obstacles that make hotel deals slower than a typical commercial real estate transaction.

Those hotel-specific obstacles are real: franchise change-of-ownership approval (background checks, financial review, brand inspection) routinely takes 60 to 90 days on its own, lender underwriting on a hospitality asset takes longer than on a stabilized office or retail property, and any Property Improvement Plan negotiation with the franchisor adds further time before the deal can close. None of that slows the clock. A replacement hotel identified on day 40 with a franchise approval process that will not clear until day 170 leaves almost no room for a financing contingency or a title issue to also go wrong.

The identification rules matter too. Within the 45-day window, the seller can identify up to three replacement properties without regard to value (the three-property rule), or more if their combined value does not exceed 200% of the relinquished property’s value (the 200% rule), or any number if the seller ultimately acquires at least 95% of the value of everything identified (the 95% rule). For a seller wanting optionality across two or three potential replacement hotels while franchise and financing diligence plays out in parallel, the three-property rule is usually cleanest.

A reverse exchange, structured through an Exchange Accommodation Titleholder under Rev. Proc. 2000-37, solves the sequencing problem for a competitive replacement property that cannot wait for the relinquished property to sell first. The titleholder acquires and holds the replacement property while the seller completes the sale of the relinquished one, and the properties swap into their final ownership positions within the same 180-day framework. Reverse exchanges cost more to administer and require careful financing structuring, but they remove the risk of losing a strong replacement property to a delayed closing.

How is the purchase price allocated under IRC 1060?

On both sides of a hotel transaction, IRC 1060 requires the total consideration to be allocated across seven defined asset classes using the residual method, reported on Form 8594 by both parties, with consistent figures required from buyer and seller. The seven classes run from Class I (cash) through Class VII (goodwill and going-concern value), with Class V (land, building, FF&E, and land improvements) and Classes VI and VII (franchise agreements and goodwill) carrying the most planning weight.

This article focuses on the exchange and disposition mechanics; the hotel acquisition due diligence and purchase price allocation guide covers the full seven-class breakdown, the negotiating dynamics between buyer and seller, and how a cost segregation study ordered during diligence supports a more favorable allocation to bonus-eligible property. What matters on the disposition side is that the same allocation negotiated at closing determines the seller’s gain by asset class, the input that drives how much of a sale can even be considered for 1031 treatment.

What’s going-concern value and how is it taxed?

Going-concern value is the additional worth of a hotel as an assembled, operating business: the trained workforce, the repeat guest base, the operational systems and vendor relationships already in place. Along with goodwill, it falls into Class VII under the IRC 1060 allocation and is treated as an IRC 197 intangible.

For the buyer, going-concern value and goodwill amortize on a straight-line basis over 15 years regardless of how the deal is otherwise structured, with no bonus depreciation available since IRC 197 intangibles are excluded from bonus treatment entirely. For the seller, gain attributable to going-concern value and goodwill is generally capital gain, though any amount up to prior amortization deductions is recaptured as ordinary income under the same mechanics that apply to other IRC 197 intangibles.

Going-concern value and goodwill do not qualify for 1031 treatment at all, since they are neither real property nor, since TCJA, eligible personal property. Any portion of a hotel sale price allocated to Class VII is taxable in the year of sale, one more reason the purchase price allocation negotiated at closing has direct consequences for how much of the transaction can actually be deferred through an exchange.

How are FF&E reserves handled at closing?

Most hotel franchise agreements and many loan agreements require the owner to maintain an FF&E reserve, typically funded at 4% to 5% of gross revenue, set aside to fund periodic replacement of furniture, fixtures, and equipment between major renovation cycles. At closing, the reserve balance is negotiated separately from the purchase price allocation, typically transferred to the buyer through a direct credit or a working capital adjustment outside the headline sale price.

For the seller, the transfer is generally additional sale proceeds allocated to personal property, since the reserve exists to replace FF&E. For the buyer, the assumed balance becomes part of the basis in whatever FF&E it eventually funds, rather than a current deduction at transfer. Because the reserve sits outside the real estate allocation, it has no bearing on the 1031 calculation for the real property gain, but it does affect the personal property side, and a seller modeling that taxable gain should account for the reserve as part of the calculation rather than as a separate, tax-free cash movement.

What depreciation recapture applies when you sell?

Depreciation recapture claws back the tax benefit of prior depreciation deductions at the point of sale, and it applies differently depending on which asset class the gain sits in, which is why the purchase price allocation matters just as much on the way out of a hotel as it does on the way in.

• Personal property (FF&E, equipment): gain up to the amount of depreciation previously claimed, including bonus depreciation, is recaptured as ordinary income under IRC 1245. Given how aggressively hotel FF&E is depreciated through bonus depreciation, most or all of the gain here is usually ordinary income, not capital gain.
• Real property (building, land improvements): gain attributable to prior depreciation is taxed as unrecaptured IRC 1250 gain, capped at a 25% maximum federal rate (versus the standard 15% to 20% long-term capital gains rate). This covers straight-line building depreciation and the accelerated depreciation reclassified through cost segregation on land improvements.
• Remaining appreciation: taxed as ordinary long-term capital gain, assuming a holding period over one year.

A 1031 exchange defers all three categories of gain on the real property portion, including the unrecaptured IRC 1250 gain, which is one of the more valuable features of the exchange for a hotel that has been through one or more cost segregation studies during its hold. That deferred recapture carries forward into the replacement property’s basis and becomes payable, absent a further exchange, whenever the replacement property is eventually sold. The personal property gain, by contrast, is never eligible for that deferral.

Can an installment sale help spread the tax hit?

An installment sale under IRC 453 lets a seller recognize gain proportionally as payments are received over time, useful when a buyer is financing part of the price through seller carryback debt or an earnout. Installment treatment applies to the capital gain and unrecaptured IRC 1250 gain components, but depreciation recapture under IRC 1245 must be recognized in full in the year of sale regardless of the payment schedule, even if the cash has not yet been received.

That creates a cash flow mismatch worth modeling on any hotel sale using seller financing: the seller can owe tax on the full IRC 1245 amount in year one while receiving only a fraction of total proceeds that same year. An installment sale and a 1031 exchange are not mutually exclusive on the same transaction. A seller can exchange the real property portion while structuring the personal property or any boot received (cash or non-like-kind property, immediately taxable) on an installment basis, though the interaction needs to be modeled by a CPA before the purchase agreement is finalized, not reverse-engineered after closing.

Does an Opportunity Zone deferral work for hotel sales?

For a seller whose gain is not being rolled into a 1031 exchange, reinvesting into a Qualified Opportunity Fund under IRC 1400Z-2 is a separate deferral mechanism worth evaluating, particularly for the personal property gain a 1031 exchange cannot reach. Unlike 1031, the program does not distinguish between real and personal property gain; any capital gain can go into a Qualified Opportunity Fund within 180 days of recognition, with the added benefit of excluding future appreciation on the investment after a 10-year hold.

The tradeoff is that the proceeds must go into a new project in a Qualified Opportunity Zone, rather than carrying forward ownership of what was just sold. It suits a seller genuinely exiting the asset and willing to redeploy capital, better than a seller who wants a similar replacement hotel through a like-kind exchange, and the two are not typically combined on the same gain, since 1031 already provides full deferral on the real property portion.

What should I do next?

A hotel sale or acquisition puts a lot of tax mechanics in motion at once, and the exchange, allocation, and recapture pieces all depend on decisions made in the purchase agreement rather than fixes applied after the fact.

• For the full seven-class purchase price allocation mechanics on the buy side, the negotiating dynamics between buyer and seller, and how a cost segregation study supports the allocation, see the hotel acquisition due diligence and purchase price allocation guide.
• For how a cost segregation study during ownership sets up the depreciation schedule that determines recapture exposure at sale, see the hotel cost segregation and depreciation guide.
• For franchise transfer approval, transfer fees, and PIP obligations triggered at the point of sale or acquisition, see the hotel franchise fees and management agreements guide and the property improvement plan tax treatment guide.
• For how ownership structure, including REIT ownership, changes the disposition analysis and the availability of certain deferral strategies, see the hotel real estate ownership structure guide.
• For the energy-efficiency deduction planning that can affect a building’s depreciable basis before a sale, see the hotel Section 179D guide.

Related guides:

• Hotel Acquisition Due Diligence Purchase Price Allocation
• Hotel Bookkeeping Usali Chart Of Accounts
• Hotel Cost Segregation Accelerated Depreciation
• Hotel Energy Efficiency Tax Credits 179D
• Hotel Entity Structure Llc Scorp Management Company

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.