Building Acquisition and Basis Allocation
Basis is generally cost under §1012. Land must be separated because it is not depreciable. In an applicable asset acquisition, a written buyer–seller allocation can bind both parties under §1060 — a risk illustrated by Peco Foods, not a rule for every purchase.
Educational information, not tax advice.
Updated 2026-10-14
Key takeaways
- Basis is generally cost under §1012, reduced for real-property taxes treated as imposed on the buyer under §164(d).
- Land must be separated because it is not depreciable.
- §1060 applies only to applicable asset acquisitions — transfers of assets that constitute a trade or business, with cost basis.
- A written allocation in those deals generally binds both parties unless the IRS determines it is not appropriate.
- Peco Foods is a risk on written §1060 allocations. It does not apply to every building purchase.
Section 1012(a) sets basis at cost, except as otherwise provided. Section 1012(b) says the cost of real property does not include real-property taxes treated under §164(d) as imposed on the taxpayer. From that cost, the land portion must be removed before depreciation, because land is not depreciable. Publication 946 repeats that land cannot be depreciated.
Section 1060 applies to applicable asset acquisitions: transfers of assets that constitute a trade or business, where the buyer’s basis is determined wholly by reference to the consideration paid. In those transactions, consideration is allocated among assets in the same manner as under §338(b)(5). If the buyer and seller agree in writing as to the allocation of any consideration, or as to the fair market value of any of the assets, that agreement binds both unless the Secretary determines that the allocation or value is not appropriate.
Many purchases of a rental building are not acquisitions of a trade or business, so §1060 may not apply. The land and building split must still be reasonable and supported. This page has not confirmed an official IRS method for those non-§1060 purchases; appraisals and other evidence are commonly used, and the taxpayer’s CPA can advise. Do not treat every closing statement as a §1060 agreement.
In Peco Foods, Inc. v. Commissioner, a buyer that agreed to written allocation schedules for two processing plants later commissioned a cost segregation study and tried to subdivide the allocated assets. The Tax Court, affirmed by the Eleventh Circuit, held the buyer to the agreed allocation. That is a risk on written allocations in deals to which §1060 applies. It is not a holding that every residential closing is locked the same way. The IRS Cost Segregation Audit Techniques Guide notes that the scope of that result beyond §1060 acquisitions is unclear. The ATG is not authority.
This page is educational information, not tax advice. Read the purchase agreement, any allocation exhibit, and Form 8594 if one was filed, before commissioning a study that proposes to re-split those numbers.
Land versus depreciable property
A study that leaves land in the building account overstates depreciable basis. A study that assigns too little to land understates it and overstates every recovery class. Either error flows through bonus and §179 computations.
Site work that is a land improvement (class 00.3) is depreciable. General site grading that is part of preparing the land is often treated as land. Publication 946’s land-improvement examples — sidewalks, roads, fences, landscaping — are improvements added to land, not the land itself.
Assessor ratios, appraisals, and residual methods are tools practitioners use when §1060 does not apply. This page does not adopt any of those as an official IRS method, because no official method for ordinary rental purchases was confirmed in this research.
When §1060 applies
The statute’s two tests are a transfer of assets that constitute a trade or business, and cost basis to the buyer. A transfer does not fail to be an applicable asset acquisition merely because §1031 applies to a portion of the assets.
Buyer and seller must furnish information to the IRS, including amounts allocated to §197 intangibles. Form 8594 is the practical filing. A written allocation that the parties signed can bind them even if they later prefer a study’s different split.
The IRS can still determine that an agreed allocation is not appropriate. That residual authority is in the last sentence of §1060(a). It is not a reason to ignore the agreement; it is a reason both sides should be able to defend the numbers.
Peco Foods as a risk, not a universal rule
Peco Foods involved written allocation schedules on processing-plant acquisitions and a later attempt to subdivide those allocated assets through a cost segregation study. The courts held the taxpayer to the agreement.
Do not say that Peco Foods applies to every building purchase. Many rentals are not applicable asset acquisitions. Many closings have no written asset-class allocation. The ATG itself treats the extra-§1060 reach as unclear.
If a written allocation exists, the study should start from that constraint and say so. Ignoring the exhibit is how that risk materializes.
Related-party and used-property overlays
Related-party purchases can fail the §179 and used-property bonus “purchase” tests even when basis is otherwise cost. See the related-party page. Allocation and eligibility are different questions.
A stepped-up §1014 basis from a decedent is cost-adjacent for the heir but is not a “purchase” for §179 or used-property bonus. The building can still be depreciated under §167 and §168.
Super Intelligence, as proposed, would organize the closing documents a CPA needs to see the allocation. It does not replace reading the contract.
Sources
- 1
- 2
- 3
- 4IRS Publication 946 — How To Depreciate Property (2025)(opens in a new tab)
Appendix B reproduces the Rev. Proc. 87-56 class lives.