What taxes do I pay when I sell a hotel?

Gain is the amount realized for an asset minus its adjusted basis, which is what you paid plus improvements minus the depreciation allowed or allowable. Because a hotel is an operating business, the IRS treats its sale as the sale of a group of assets. When goodwill or going concern value could attach, both the seller and the buyer must file Form 8594 and allocate the price across asset classes. Furniture, fixtures, buildings, land and equipment are generally Class V, other section 197 intangibles are Class VI, and goodwill and going concern value are Class VII.^[4]

The allocation is negotiated in the purchase agreement, and the two sides want different things. A buyer generally prefers more price on FF&E, which it can depreciate quickly. A seller generally prefers less, because FF&E gain is ordinary income. Settle the allocation with your CPA before you sign, not at closing.

This is the point owners, and a lot of web pages, get wrong. A hotel building is section 1250 property. IRS Publication 544 says gain on section 1250 property is ordinary income only to the extent of "additional depreciation", which for property held more than a year means depreciation taken in excess of straight-line.^[2] Nonresidential real property is depreciated over 39 years under the general depreciation system, and a hotel is on that side of the line: Publication 946 excludes units in a hotel or motel from the definition of a dwelling unit, so a hotel is not residential rental property.^[9] A building depreciated straight-line has no additional depreciation, so none of its gain is ordinary under section 1250.

Instead, the part of the long-term gain that is due to depreciation is "unrecaptured section 1250 gain". The IRS taxes it at a maximum 25 percent rate. It cannot be more than your net section 1231 gain for the year.^[1][2]

Two exceptions. A C corporation must treat an extra 20 percent of that depreciation-related gain as ordinary income.^[2] And for a building held one year or less, all of the depreciation counts as additional depreciation, so it is recaptured as ordinary income.^[2]

Real property used in a business and held longer than a year is section 1231 property. After the recapture amounts are carved out, the remaining gain on the building and all of the gain on the land is section 1231 gain. If your section 1231 transactions net to a gain for the year, it is treated as long-term capital gain.^[2]

The IRS lists the long-term rates as 0, 15 and 20 percent. For tax years beginning in 2025, the 20 percent rate starts above $600,050 of taxable income for married couples filing jointly and above $533,400 for single filers.^[1] A hotel sale usually pushes the owner's income past those lines in the year of sale, so plan on 20 percent for this layer.

One trap: if you deducted net section 1231 losses in the previous five years, an equal amount of this year's section 1231 gain is taxed as ordinary income first.^[2] Most hotels are owned through LLCs and partnerships, so all of these layers pass through to the members' own returns.

Publication 544 is direct: gain on the disposition of section 1245 property is treated as ordinary income to the extent of depreciation allowed or allowable, and only gain above that is section 1231 gain.^[2] Section 1245 property includes depreciable personal property, which covers guest room furniture, televisions, kitchen and laundry equipment and vehicles. Hotel FF&E is usually depreciated fast and is often fully depreciated, so nearly every dollar of price allocated to it is ordinary income.

The same rule reaches anything else you depreciated as personal property. If a cost segregation study moved parts of the building into shorter-lived personal property classes, you took faster deductions then, and that depreciation comes back as ordinary income now.

The net investment income tax is 3.8 percent on the lesser of net investment income or the amount by which modified adjusted gross income exceeds $250,000 for joint filers or $200,000 for single filers. It reaches gain on property held in a trade or business that is a passive activity for the taxpayer. It does not apply to income from an active business.^[3] For a hotel owner, the answer depends on whether that owner materially participates. That is a question of fact for your CPA.

Transfer taxes are set by states and localities. Florida's documentary stamp tax on deeds is 70 cents per $100 of consideration, or 60 cents plus a 45 cent surtax in Miami-Dade County.^[6] Georgia charges $1 for the first $1,000 and 10 cents for each additional $100.^[10] Washington's real estate excise tax is graduated, from 1.1 percent on the first $525,000 to 3 percent on the portion of price above $3,025,000, before local tax.^[7] Some states charge nothing. Who pays is set by local custom and the contract. The rest of the closing cost stack is at How much does a hotel broker charge?.

Section 1031 lets you defer gain when you exchange real property held for business or investment for like-kind real property. You have 45 days after the sale to identify replacement property and 180 days to close on it, or until the due date of your tax return, including extensions, if that comes first.^[11] Since the Tax Cuts and Jobs Act, section 1031 applies only to real property, not personal or intangible property, and any money or other property you receive is taxable to that extent.^[5] For a hotel, that means the price allocated to FF&E and goodwill is taxed even in a well-run exchange. The mechanics, including the hotel-specific problems, are at /hotel-financing/1031-exchange-hotels.

Seller financing spreads capital gain over the years you collect payments. It does not spread recapture. Publication 537 requires depreciation recapture income to be reported in the year of sale, whether or not a payment was received that year.^[12]

Guide

What is involved in selling a hotel?

Other questions in this guide

• How much does it cost to sell a hotel through a broker?
• What is the step-by-step process for selling a hotel?
• What documents do I need to sell my hotel?
• Should I sell my hotel before the franchise agreement expires?
• Selling a hotel: questions owners ask

Terms defined in the glossary

• Net Operating Income (NOI)
• Hotel Cap Rate
• BOV (Broker Opinion of Value)

Our own data

• Matthews Hotel Index, Q1 2026