Purchase price adjustment

Purchase price adjustments capture the change in value of an asset typically between the negotiation and closing.

Example

Antonio purchased property from Shylock for $50,000. At closing, Antonio paid $10,000 to Shylock and executed a promissory note payable to "Shylock or order" for $40,000. Following the closing, Antonio approached Shylock, upset that the property was in fact worth only $42,000. After a few weeks of negotiations, the parties agreed to reduce the amount of the promissory note to $32,000.[1]

Federal Tax Implications

A Purchase Price Adjustment is not included as gross income under the U.S. tax code.[2] The adjustment between the parties is merely re-setting the amount of the purchase price. Additionally, the price adjustment has to exist between the seller and the buyer (no third parties can be involved).[3]

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References
  1. Samuel A. Donaldson, Federal Income Taxation of Individuals: Cases, Problems and Materials, 2nd Edition (St. Paul: Thomson/West, 2007), 113-14.
  2. See IRC ยง 108(e)(5)(A).
  3. Ibid.
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