Most real estate investors negotiate hard on one number: purchase price. But there’s a second number that can swing your after-tax proceeds by hundreds of thousands of dollars, sometimes more. It’s called purchase price allocation and most people treat it as an afterthought.

Here’s the short version: In an asset sale, the IRS requires both buyer and seller to allocate the purchase price across different asset classes (real estate, equipment, goodwill, etc.) under Section 1060. How you allocate that price determines how it gets taxed as capital gains, depreciation recapture, or ordinary income. Same deal. Same headline price. Completely different result.

For example: shifting $2M of allocation from real estate to equipment can trigger depreciation recapture taxed at up to 37% instead of long-term capital gains rates. On a $20M deal, that’s a $300K–$400K+ difference in federal taxes alone and potentially more when state taxes are factored in.

Buyers and sellers are naturally in conflict here:

• Buyers want more allocated to equipment → faster depreciation shields

• Sellers want more allocated to real estate → better capital gains treatment

• Both often want more in goodwill but for different reasons

The investors who understand this treat allocation like a second purchase price and negotiate it accordingly, ideally at the LOI stage before leverage disappears.

The bottom line: it’s not what you sell it for; it’s what you keep.

Editor’s Note:
Tax season may be over, but property tax protests are a different beast entirely. Ralph just finished protesting valuations across our commercial portfolio and is sharing timely insights while the process is still fresh. If you’re a commercial property owner, this guide is worth your time.

Each year, commercial property owners receive assessment notices that can have a major impact on their bottom line. Property taxes can eat up 10 to 15% of revenue, often making them the largest single expense for commercial real estate assets.

If you own commercial real estate, it’s critical to properly account for all traditional operating costs, including management fees, insurance, and especially property taxes. And when valuations come in too high, you have the right, and the opportunity, to protest.

Understand Your Valuation

Appraisal districts typically use one of three approaches to value commercial real estate: Income approach, Cost approach, or Sales Comparison. These models are often flawed, especially if:

Your building has high vacancy
Rental income is down
You recently acquired the property at a lower price
There are deferred maintenance or structural limitations

Build a Strong Case

Start by identifying which valuation method applies best:

New construction? Cost method may be most appropriate.
Stabilized income-producing property? Income or sales comparison will usually apply.

Support your case with clear, credible evidence:

Rent rolls & operating statements
Photos of condition issues
Third-party appraisals or broker opinions
Comparable sales or lease data
Cap rate support (if using the income approach)

Request an Informal Meeting

This is your best chance to resolve the protest before a formal ARB hearing.

Ask the appraiser:

Which valuation method was used
What cap rate and market rent assumptions were applied
For a copy of their cap rate schedule

Compare their assumptions to your actual performance to identify gaps.

Lessons from Experience

After years of protesting property taxes, here are a few things I’ve learned that can make a big difference:

Be courteous and professional. Appraisers handle thousands of properties. Respect goes a long way.
Build rapport. You may see the same appraiser year after year, so treat it like a working relationship.
Don’t bluff or be outrageous. Start with a defensible number. Leave negotiating room, but don’t go overboard.
Double-check your evidence. Make sure it strengthens your case; never submit anything that could backfire.
Always protest. Even if you’ve been denied in the past, appraisers often make a settlement offer up front.
Stay organized. Clean, well-prepared documentation helps your credibility and makes a strong impression.

Why It’s Worth It

Even a small reduction in appraised value can lead to substantial tax savings. Multiply that across several years, and the impact on cash flow and value is meaningful.

Bottom Line

Don’t assume your property’s assessed value is accurate. Errors happen, and you don’t have to accept them. With the right documentation and a professional approach, you may be able to achieve meaningful relief.
If you’ve received an assessment that doesn’t reflect reality, feel free to reach out. I’d be happy to offer perspective or help you get started in the right direction.