Understanding the Difference
In an asset sale, the entity sells the property itself — the buyer receives a deed, the property changes ownership, and transfer taxes apply. In an entity sale, you sell the ownership interests in the entity (LLC membership units, corporate shares, partnership interests) — the property stays with the entity, but the entity has new owners.
The distinction matters enormously for taxes. New York State and local transfer taxes apply to asset sales but may not apply to entity sales (though New York has anti-avoidance provisions for transfers of controlling interests in entities that own real property). The buyer may prefer an asset sale for the stepped-up basis; the seller may prefer an entity sale for transfer tax savings.
When to Consider an Entity Sale
Entity sales are most advantageous when the property has appreciated significantly (transfer tax savings can be substantial on high-value properties), the entity is clean (no hidden liabilities or litigation), the buyer is a sophisticated investor comfortable with due diligence of the entity, and both parties' tax advisors agree the structure benefits the overall transaction.
Entity sales are common for commercial properties and large residential investments. They are less common for standard residential sales because most residential buyers prefer the certainty and simplicity of an asset purchase with clear title insurance.
Risks and Considerations
For buyers, the main risk of an entity sale is inheriting unknown liabilities — debts, environmental issues, lawsuits, or tax obligations that were not discovered during due diligence. Buyers mitigate this through comprehensive due diligence, representations and warranties in the purchase agreement, and sometimes holdback provisions.
For sellers, the main consideration is ensuring the sale qualifies for the intended tax treatment. New York's real property transfer tax includes provisions that can treat transfers of controlling interests in real property-holding entities as taxable transfers. Your tax attorney should structure the transaction to achieve the intended result within legal boundaries.