Question 1

What is purchase price allocation?

Accepted Answer

Purchase price allocation is the process of dividing the total purchase price among the various assets acquired in a transaction. This is critical for: tax purposes (different assets are taxed at different rates and have different depreciation schedules), accounting (the allocation determines the basis of each asset on the buyer’s books), and negotiation (the buyer and seller may have conflicting interests in how the price is allocated). In real estate: the purchase price is typically allocated between: land (not depreciable for tax purposes), building/improvements (depreciable over 27.5 years for residential or 39 years for commercial), and personal property (depreciable over 5-7 years).

Question 2

How does purchase price allocation affect Florida real estate taxes?

Accepted Answer

Tax impact: land (the portion allocated to land is not depreciable; the buyer gets no tax benefit from the land allocation until the property is sold), building (the portion allocated to the building is depreciable; residential: 27.5 years straight-line; commercial: 39 years straight-line), personal property (the portion allocated to personal property is depreciable over 5-7 years; this includes: furniture, fixtures, equipment, and appliances), and documentary stamp tax (Florida documentary stamp tax is calculated on the total purchase price, regardless of the allocation). The buyer generally wants: more allocated to the building and personal property (for faster depreciation), and the seller generally wants: more allocated to long-term capital gain assets.

Question 3

Must the buyer and seller agree on the allocation?

Accepted Answer

Agreement: IRS Form 8594 (Asset Acquisition Statement): for business acquisitions, the buyer and seller must file Form 8594 with their tax returns, reporting the agreed-upon allocation. If the parties do not agree: each party files their own allocation, and the IRS may challenge inconsistent allocations. For real estate: the purchase contract should include an allocation clause (specifying the allocation of the purchase price among land, building, and personal property). The allocation must be: reasonable (based on fair market values), consistent (both parties should use the same allocation), and documented (supported by appraisals or other valuation evidence).

Purchase Price Allocation

Purchase Price Allocation

RE Allocation

Tax Impact

Agreement

Related Terms

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