Purchase Price Allocation & Component Valuation
Separating Real Property, Tangible Assets, and Intangible Enterprise Value
At My Financial Valuation, Purchase Price Allocation (PPA) is treated as an enterprise‑level valuation discipline — not a mechanical accounting exercise.
In complex real estate and operating‑asset transactions, total consideration does not represent a single homogeneous asset. Value must be carefully separated among:
- Non‑depreciable land
- Depreciable real property improvements (IRC §1250)
- Tangible personal property (IRC §1245)
- Identifiable intangible assets and residual business enterprise value (goodwill)
Proper allocation affects depreciation and amortization timing, property and transfer tax exposure, financial reporting under ASC 805 / IFRS 3, and IRS compliance under IRC §1060 and Form 8594.
We provide integrated appraisal and enterprise valuation services designed to withstand audit, tax, lender, and institutional scrutiny.
Why Purchase Price Allocation Matters
In asset‑intensive and operating real estate transactions — hotels, healthcare, industrial facilities, data centers, infrastructure platforms, and mixed‑use operating assets — a material portion of value is frequently embedded outside the building shell.
Misallocation creates permanent consequences:
- Overstated real estate value increases ad valorem and transfer taxes
- Under‑identified tangible assets permanently lose accelerated depreciation
- Improper intangible classification creates audit and penalty exposure
- Inconsistent allocations impair lender, investor, and financial reporting reliance
Allocation is not an accounting formality. It is a capital discipline decision.
The Four Core Components of Transaction Value
Enterprise and operating‑asset transactions generally contain four distinct value layers:
Land (Non‑Depreciable)
Residual land value must be abstracted using appraisal methodology and market evidence. Percentage shortcuts routinely distort outcomes and create property‑tax exposure.
Buildings & Improvements (Section 1250)
Long‑life structural and shell assets depreciated over 27.5 or 39 years.
Tangible Personal Property (Section 1245)
Short‑life, accelerated assets including:
- Furniture, fixtures & equipment (FF&E)
- Machinery and production equipment
- Process systems and dedicated infrastructure
- Electrical, mechanical, and control systems tied to operations
Intangible Assets & Business Enterprise Value
Including:
- Assembled workforce
- Operating licenses and permits
- Trade names and brands
- Customer relationships and contracts
- Going‑concern value and residual goodwill
Separating these layers requires coordinated real estate appraisal, tangible asset valuation, and business valuation methodology.
Relationship Between Cost Segregation and Purchase Price Allocation
Cost Segregation and Purchase Price Allocation analyze many of the same assets — but they serve different purposes and arrive at fundamentally different conclusions.
Cost Segregation focuses on tax recovery and depreciation classification based on physical characteristics, engineering function, and placed‑in‑service treatment.
Purchase Price Allocation focuses on fair‑value allocation of total consideration among real property, tangible personal property, identifiable intangibles, and residual enterprise value.
The same asset base may therefore produce materially different results and must be reconciled carefully.
Physical Depreciation vs. Economic Value
A critical distinction is the treatment of physical depreciation versus enterprise‑level economic value.
In many large commercial and operating assets, cost segregation captures are driven by:
- Physical age and remaining useful life
- Engineering‑based system depreciation
- Functional obsolescence
- Capital condition at placement in service
In a recent large‑scale engagement involving an approximately 800,000 square‑foot office building, accelerated property capture represented approximately 48% of Replacement Cost New, reflecting substantial physical depreciation and high vacancy conditions.
That result was economically correct for depreciation purposes — but does not represent transaction‑level fair value.
In Purchase Price Allocation, tangible asset values are filtered through:
- Market‑based fair value
- Income allocation between real estate and enterprise operations
- Residual derivation of identifiable intangibles and goodwill
As a result, PPA allocations frequently represent a materially different — and lower — tangible asset base after enterprise economics are considered.
Sequencing Matters: Cost Segregation Before PPA
In complex transactions, proper sequencing is critical.
In many engagements:
- Cost Segregation establishes the physical and functional asset base
- Purchase Price Allocation then filters total consideration through:
- Tangible asset value
- Identifiable intangible assets
- Residual goodwill and enterprise value
When PPA is performed after cost segregation, the derivation of intangible assets and goodwill depends directly on the quality, defensibility, and internal consistency of the underlying tangible allocations.
Improper sequencing or inconsistent methodologies permanently distort:
- Depreciation and amortization timing
- Property and transfer tax exposure
- Financial reporting and audit defensibility
- IRS compliance under §1060 and Form 8594
The Risk of Third‑Party Inconsistency
A common failure point occurs when:
- Cost Segregation is performed by one firm
- Purchase Price Allocation is performed by another
- Methodologies, asset definitions, and valuation assumptions are not aligned
This frequently produces:
- Inconsistent land and building abstractions
- Conflicting tangible asset classifications
- Over‑ or under‑statement of intangible assets
- Audit exposure and reconciliation failures
Once reported, these inconsistencies are difficult — and sometimes impossible — to correct without amended filings and elevated audit risk.
Our Integrated Approach
US Valuation integrates within a single coordinated framework:
- Certified General real estate appraisal
- Engineering‑based cost segregation
- Tangible personal property valuation
- Business and enterprise valuation
- Intangible asset identification and goodwill derivation
Each engagement emphasizes:
- Market‑supported land abstraction
- Engineering‑based tangible asset identification
- Explicit exclusion of non‑taxable intangible value from ad valorem bases
- Full reconciliation to total consideration
- Documentation suitable for IRS, auditors, courts, lenders, and institutional investors
Regulatory & Reporting Framework
Our allocations are developed in compliance with:
- IRC §1060 residual method
- IRS Form 8594 asset classification
- ASC 805 / IFRS 3 business combinations
- USPAP appraisal standards
- NACVA and ASA business valuation standards
We routinely support:
- Buyer and seller allocation agreements
- Transaction closing documentation
- Audit and tax review
- Property and transfer tax exposure mitigation
- Lender and investor reliance
When Purchase Price Allocation Is Most Critical
- Operating real estate acquisitions (hotels, healthcare, senior housing)
- Industrial, manufacturing, and infrastructure transactions
- Data center and digital infrastructure platforms
- Sale‑leasebacks and recapitalizations
- Multi‑property portfolio acquisitions
- Post‑acquisition cost segregation integration
Bottom Line
Purchase price allocation determines how capital is taxed, depreciated, amortized, and defended — for decades.
When value is not properly separated between real property, tangible personal property, and intangible enterprise assets, the cost is permanent.
When cost segregation and purchase price allocation are integrated properly, they become a capital discipline tool — optimizing depreciation, amortization, tax reporting, and enterprise valuation simultaneously.
Begin a Confidential Consultation
Whether your transaction involves operating real estate, infrastructure, or complex asset mixes, allocation should begin with independent economic judgment — not mechanical accounting.
We invite you to discuss scope, asset composition, and defensibility requirements before closing.
My Financial Valuation
Enterprise Business Valuation • Purchase Price Allocation • Capital Discipline