Purchase price allocation and real estate: splitting land, building and business

Published October 25, 2026 · Rules checked against SBA and IRS sources as of October 2026

Buying the building along with the business changes the allocation in two ways. The real estate becomes the biggest Class V asset, often bigger than all the equipment combined. And inside that real estate line sits a second split, land versus building, that decides how much of the price you can ever depreciate. Get it wrong and you lose deductions for decades. This page covers how the split is made, a worked example, and how it lines up with an SBA lender's appraisal. It isn't tax advice.

Where real estate sits in the allocation

The Form 8594 instructions say furniture and fixtures, buildings, land, vehicles and equipment that make up all or part of a trade or business are generally Class V assets. So in an asset purchase that includes the property, the real estate gets its fair market value in Class V, alongside equipment, before anything reaches the intangibles or goodwill.

Real estate is also one of the few assets where specific transfer costs attach directly. Treasury regulation 1.1060-1(c)(3) says costs specifically identifiable with transferring an asset, and it names real estate transfer costs as an example, adjust that asset's allocation. Title, recording and transfer taxes tied to the property go to the property, not into goodwill.

Splitting land from building

Land doesn't wear out, so IRS Publication 946 says you can't depreciate it. Buildings and many improvements you can. Publication 551 gives the rule for a lump-sum purchase: allocate the basis among the land and buildings by multiplying the price by each asset's fair market value over the fair market value of the whole property. If you aren't certain of the fair market values, you can use the assessed values for real estate tax purposes.

Pulling land improvements and equipment out of the building line is where the money is. A cost segregation study does this in detail for larger properties. For smaller ones, the appraisal and a sensible equipment list often get you most of the way.

Worked example

Illustration, not a real deal

Say you're buying an auto body shop and the building it operates from for $2,100,000. The lender's appraisal values the real estate at $900,000 and, using comparable land sales, puts the land at $250,000. Your adviser's review of the site identifies $60,000 of paving, fencing and site lighting that qualifies as land improvements. Everything else in the real estate value is building.

1. Real estate in Class V: $900,000.
2. Land: $250,000, not depreciated.
3. Land improvements: $60,000, recovered as 15-year property.
4. Building: $900,000 − $250,000 − $60,000 = $590,000, recovered over 39 years.
5. Rough annual building depreciation: $590,000 ÷ 39 = about $15,128. (Actual first-year and last-year amounts follow the mid-month convention; your preparer handles that.)
6. The remaining $1,200,000 of the price is allocated across the business's inventory, equipment, intangibles and goodwill under the residual method.

Now compare a shortcut. Say the county assessment shows land at 40% of the property's total assessed value. Using that ratio, land would be $900,000 × 40% = $360,000, and the building and improvements $540,000. That's $110,000 less depreciable basis than the appraisal-based split, roughly $2,800 a year of building depreciation over 39 years. Assessment ratios are allowed when fair market values are uncertain, but when you have an appraisal that separately values land, it's usually the better support.

Fixtures: real estate or equipment?

Some of the most valuable items in an operating property sit on the line between building and equipment: walk-in coolers, paint booths, lifts, kitchen hoods, car wash tunnels, specialized wiring and plumbing that serves particular machines. How they're classified changes how fast they're recovered. Items that are part of the building's structure generally follow the building's 39-year life; equipment that serves the business and could be removed often has a much shorter MACRS life. Make sure the equipment appraisal and the real estate appraisal don't both count the same items, and that items the seller is taking with them don't appear in either. A walk-through with both lists in hand catches most of the problems.

How this fits an SBA-financed deal

Under SOP 50 10 8.1, the "Business Purchase Price" excludes owner-occupied commercial real estate. The lender removes the appraised value of the real estate from the contract price, and the valuation and Quality of Earnings thresholds are measured on what's left. In the example, the Business Purchase Price would be $2,100,000 − $900,000 = $1,200,000. That gap matters: a deal that looks like it's over a threshold on the headline price may be under it once the property comes out.

• Two loans or a blended term. Real estate can carry a longer amortization than the business portion. When financed together, the term is often a weighted blend; see SBA loans to buy real estate with a business.
• Occupancy. For an existing building, the business generally must occupy at least 51% of the rentable property to finance it with SBA proceeds.
• Special purpose property. For limited-market properties built for one use, such as hotels or self-storage, the SOP requires the going-concern appraisal to allocate separate values to land, building, equipment and intangibles, performed by a certified general appraiser with specific experience. That appraisal hands you most of the allocation; see commercial property appraisal for SBA loans.
• Environmental review. SBA requires an environmental investigation on commercial property taken as collateral, starting with a Phase I for environmentally sensitive uses such as auto repair or sites where dry cleaning ever took place. The findings can affect value, and therefore the allocation.

Separate entity, separate contract

Buyers often hold the real estate in its own company that leases the property to the operating business. If the seller is also split that way, there may be two contracts: one for the property and one for the business assets. Two contracts don't make two unrelated deals. The Section 1060 regulations aggregate related transfers from the same seller to the same buyer when deciding what the "group of assets" is, so check with your adviser how the property contract interacts with the business allocation and Form 8594.

For more on how each class is taxed, see purchase price allocation tax considerations, and for the full method, purchase price allocation. Rules checked against IRS Publications 551 and 946, the Form 8594 instructions and SOP 50 10 8.1 as of October 2026.

Common questions

Related guides

• Commercial property appraisal in an SBA business acquisition
• SBA loans to buy real estate with a business: terms and limits
• Purchase price allocation: how to split a business price across assets
• Purchase price allocation tax considerations for buyers and sellers
• SBA loans for hotels, self storage, car washes and gas stations

This guide explains rules and practice in plain English. It isn't legal, tax or credit advice, and SBA and IRS rules change. Check the current SOP, regulations and your lender's requirements before you rely on anything here. Examples with made-up businesses are illustrations, not real deals.