How will you approach purchase price allocation?

After months of preparation, your real estate firm has the right people, the right systems, and the right capital in hand to close your first major property deal.

The path ahead is exciting, but decisions made during this next phase, particularly around purchase price allocation (PPA), can significantly affect your tax burden, cash flow, and future profits at sale. Too often, this step is rushed or overlooked entirely. But it’s one of the most strategic financial levers in the real estate capital cycle.

Let’s break it down.

What Is Purchase Price Allocation (PPA)?

When you acquire a property or a business that owns property, you must allocate the total purchase price across various asset categories, such as land, building, equipment, intangible assets, leases, and goodwill. This allocation becomes the foundation of your tax strategy, affecting depreciation schedules, expense timing, and eventual gain or loss recognition at sale.

The right strategy can accelerate depreciation, increase near-term tax deductions, and put you in a stronger financial position down the road.

In the real estate capital cycle, PPA takes place around closing, once the deal is finalized and the finance team is preparing to record the transaction. It’s a critical junction to pause and assess the following strategic questions:

• Do you want to front-load depreciation to increase short-term deductions?
• Are you planning to hold long-term or short-term?
• Who is your anticipated buyer at exit?

A well-structured PPA can support audit readiness, tax efficiency, and valuation credibility.

The Difference Between GAAP vs. Tax Allocations

Here’s a breakdown of the differences between Generally Accepted Accounting Principles (GAAP) and IRS requirements:

Tax Allocations

Modified Accelerated Cost Recovery System (MACRS) is a depreciation system used by the IRS to recover the cost of tangible property over time for tax purposes.

When you allocate the purchase price of a hotel across asset classes like building, furniture, equipment, and land improvements, the IRS lets you depreciate many of those assets using MACRS schedules, which determine:

• How long you can depreciate the asset (the “recovery period”).
• How fast you can depreciate it (accelerated vs. straight-line methods).

GAAP Allocations

When you buy real estate, the transaction could be treated in two different ways under GAAP.

• An asset acquisition is when you buy specific assets and related liabilities. Within the real estate context this is typically just land, building, and maybe some furniture, but not enough ongoing operations to qualify as a business.
• A business combination occurs when you obtain control of one or more businesses, triggering specific accounting treatment under GAAP and requiring fair value allocation.

Business combination examples include:

• A hotel with a brand, staff, booking system, and guest contracts.
• A senior living facility with in-place service staff and resident agreements.
• A self-storage business with lease contracts, marketing systems, and tenant management software.

If your deal is classified as a business combination under ASC 805:

• You must allocate the purchase price to all identifiable assets and liabilities at fair value.
• This includes separating out and measuring intangible assets (e.g., franchise agreements, management contracts, customer lists).
• Any excess of the purchase price to the net fair value of identifiable assets and liabilities is recorded as goodwill on the balance sheet.
• This allocation affects GAAP financial statements, not your tax filings (which follow IRS rules).

Example: Allocating Purchase Price for a Boutique Hotel

Consider a real estate firm purchasing a well-established, independently operated boutique hotel for $10 million. The property has stable operations, a consistent guest base, and long-term staff contracts. A common allocation might be:

This allocation strategy can improve tax benefits through accelerated depreciation and amortization, improving cash flow in the early years of ownership.

Why Allocation Strategy Matters

How you structure your PPA impacts everything from tax savings to your long-term exit strategy. The right mix can improve cash flow early in the hold period while the wrong one can trigger unfavorable tax consequences later.

Accelerated Depreciation and Cash Flow

Assets like furniture, fixtures, and landscaping often qualify for accelerated or bonus depreciation, delivering larger upfront deductions than the building itself. Cost segregation studies can help identify and support these faster-depreciating components.

Intangibles and Recapture Risk

Allocating to goodwill, franchise rights, or leases in place can offer amortization benefits, but over allocating to short-life assets like FF&E may lead to higher depreciation recapture taxes if you sell early. Know your holding period and align accordingly:

• Short-term holds may favor allocations to land and building to reduce recapture exposure.
• Long-term holds may favor more FF&E and improvements to maximize deductions.

Consider Future Buyers and Tax Liabilities

Institutional buyers or real estate investment trusts (REITs) may prefer different allocation profiles. Also, be aware that personal property (like FF&E) may be subject to annual taxes depending on your state, which can wipe out the benefits of faster depreciation.

We Can Help

Avoid relying exclusively on the bank’s appraisal when determining asset allocation. Include intangibles, factor in local tax rules, and revisit your allocation strategy as tax laws change. A tax advisor can help you strike the right balance between upfront tax savings and long-term return on investment (ROI).

At Elliott Davis, we work with growing real estate firms that are preparing for an acquisition or scaling into new markets. Our real estate team can:

• Prepare IRS-compliant purchase price allocations.
• Support audit readiness and due diligence documentation.
• Structure acquisitions to improve tax advantages and plan for profitable exits.

Contact us today to get started.

The information provided in this communication is of a general nature and should not be considered professional advice.  You should not act upon the information provided without obtaining specific professional advice.  The information above is subject to change.