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When a Broker Buys a Brokerage: Tax Steps for Buyers — Goodwill, Depreciation and Earn‑Outs

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2026-02-15

12 min read

Buyer’s tax due diligence guide for brokerage acquisitions: goodwill, depreciation, earn‑outs, allocations and 2026 strategies to protect deal value.

Hook: Buying a Brokerage? Tax Risks Can Erase Your Deal Value — Here’s How to Protect It

Acquiring a real estate brokerage in 2026 means buying people, brand, recurring revenue and regulatory baggage. With consolidation accelerating — exemplified by recent conversions where REMAX added roughly 1,200 agents and 17 offices from Royal LePage late 2025 — buyers are paying premiums for agent rosters and platform scale. Those premiums translate into large pools of goodwill and contingent payments (earn‑outs), and they change how you should run a tax due diligence and deal-structure playbook. Get this wrong and deferred tax benefits, misallocated purchase price, or earn‑out surprises will turn an otherwise successful acquisition into a value leak.

Top takeaways — What every buyer must do before signing

Decide asset vs. stock early — it drives whether you can step up tax basis and amortize goodwill under Section 197.
Document purchase price allocation (Form 8594) and align seller/buyer positions to avoid mismatches and audits.
Design earn‑outs carefully — treat contingent payments as additional purchase price when appropriate, and build clear measurement/escrow mechanics. See guidance on tying adaptive bonuses to recurring revenue for ideas on structuring performance‑linked pay.
Assess agent classification risks and payroll exposure — reclassifications can create retroactive payroll tax liabilities.
Lock in amortization and depreciation strategies for intangible and tangible assets to maximize tax shields post‑close.

The 2026 context: Why brokerage deals demand updated tax playbooks

Late 2025 and early 2026 showed a spate of franchise conversions and leadership reshuffles (for example, the REMAX conversions and executive movements at Century 21 New Millennium). These moves reflect three trends buyers must account for in tax planning:

Higher valuations for agent‑centric scale: Buyers pay more for rosters and recurring referral revenue streams, increasing goodwill that will need careful amortization treatment.
Technology and subscription revenue: Brokerages are packaging services, CRM subscriptions and lead platforms into recurring revenue — creating new categories of intangible assets that can be amortized if acquired. Consider modern hosting and platform architectures when modeling recurring revenue and SaaS‑style services (cloud‑native hosting trends).
Cross‑jurisdiction complexity: Bigger brokerages often operate in multiple states and countries (e.g., Canadian operations in conversions). Multistate tax compliance, withholding and international tax consequences must be handled up front.

Step 1 — Decide structure: Asset purchase vs. stock purchase (and 338 elections)

The first structural decision determines tax outcomes for buyer and seller. From the buyer's perspective, an asset purchase generally offers the best tax benefit because it permits a step‑up in basis for acquired assets and immediate depreciation/amortization as allowed by the Code:

Asset purchase: Buyer acquires individual assets (goodwill, furniture, leasehold improvements, software). Under Section 197, acquired intangible assets (including purchased goodwill) are amortized over 15 years straight‑line for tax purposes. Tangible property is depreciated under MACRS according to property class lives.
Stock purchase: Buyer acquires ownership of the legal entity. Tax attributes (basis, NOLs) often carry over and the buyer does not get a step‑up in the entity's asset basis unless a Section 338 election is made.

338(h)(10) and 338(g) elections let buyers (and sellers) achieve a tax result similar to an asset acquisition even when the transaction is a stock purchase — but these require seller consent and careful timing. Plan the election strategy early because it affects purchase price allocation, seller tax rates and closing mechanics.

Practical action

Ask sellers early whether they will agree to a 338 election. If not, price accordingly.
Model both structures for cash tax flow across 3–5 years: the value of amortization and depreciation vs. potential retained tax attributes.

Step 2 — Purchase price allocation: Section 1060 and Form 8594

For asset acquisitions (and deemed asset acquisitions under 338), purchase price allocation is governed by Code Section 1060 and Treasury regulations. Both buyer and seller must file Form 8594 and use matching allocations across seven classes of assets (e.g., tangible property, accounts receivable, goodwill). A mismatch invites IRS attention and potential adjustments.

Key allocation principles

Goodwill and going concern value are treated as Section 197 intangibles and amortizable over 15 years.
Tangible assets (furniture, computers, leasehold improvements) go into MACRS schedules with class lives (5, 7, 15, or 39 years as applicable).
Customer lists, non‑competes, and franchise rights may also be Section 197 assets; their treatment depends on whether they are purchased and whether they meet statutory criteria.

Practical action

Prepare a draft allocation schedule with supporting valuation assumptions before signing. Use market multiples, discounted cash flows and a breakdown of recurring vs. one‑time fees.
Agree allocation with the seller in the purchase agreement to reduce post‑close disputes.
File Form 8594 contemporaneously and ensure both parties use the agreed allocation.

Step 3 — Goodwill and amortization: Maximize your 15‑year shield

Goodwill is often the largest single intangible in a brokerage acquisition. By classifying purchased value as Section 197 goodwill, buyers obtain a guaranteed 15‑year straight‑line amortization deduction. That deduction reduces taxable income regardless of business performance and is a major rationale for structuring deals as asset purchases or 338 elections.

Practical action

Ensure the purchase agreement expressly identifies goodwill and other Section 197 assets as part of the purchase price allocation.
Coordinate accounting and tax amortization start dates (amortization generally starts when the assets are placed in service).
Keep valuation support for goodwill allocations in your workpapers — audits over valuation are common in transactions with large goodwill percentages.

Step 4 — Depreciation: Tangible assets and real property

Identify and segregate tangible assets at closing. Typical classifications for a brokerage include:

Office furniture and equipment: MACRS 7‑year.
Computers and software: MACRS 5‑year for certain purchased off‑the‑shelf property; specialized acquired software may have different treatment.
Leasehold improvements: Qualified leasehold improvements may be 15‑year property (or the applicable shorter life under post‑TCJA rules); confirm current classification.
Purchased buildings: 39‑year nonresidential real property.

Remember that by 2026, bonus depreciation continues to phase down under the TCJA schedule — in 2026 bonus depreciation is 20% for qualifying property placed in service that year. Check current law and consult your tax advisor for exact percentages and whether your property qualifies.

Practical action

Perform a fixed‑asset inventory and purchase‑price allocation line‑by‑line at closing.
Consider cost segregation if the deal includes building purchases to accelerate depreciation on components eligible for shorter lives.

Step 5 — Earn‑outs and contingent payments: Tax characterization and drafting tips

Earn‑outs are common in brokerage deals as buyers tie part of the purchase price to post‑close performance (agent retention, gross commission income, EBITDA). The tax treatment of earn‑outs affects both parties' tax timing and the buyer’s deduction character.

How earn‑outs are generally treated

If a contingent payment is part of the purchase price (clearly documented), it is treated as capital consideration and allocated under Section 1060.
Payments for post‑close services by the seller (e.g., transition services, non‑compete payments) are ordinary income to the recipient and deductible as compensation by the buyer if properly structured.
Measurement mechanics matter: earn‑outs that depend on future events may require present valuation and specific allocation rules per treasury guidance.

Drafting best practices for buyers

Define performance metrics crisply (e.g., agent‑count, GCI by office, retention percentage) and specify accounting methodologies.
Include independent verification by a neutral accountant to calculate earn‑outs to reduce dispute risk and IRS challenges. Consider resilient data pipelines for independent measurement (edge message broker patterns).
Split payments: allocate earn‑out items into capital consideration vs. compensation. For example, pay a portion as additional purchase price (capital) and a portion as compensation for transitional services (ordinary) if sellers will work post‑close.
Use escrow and holdbacks to secure indemnities for tax liabilities and agent classification claims. See practical escrow and seller‑playbook mechanics (advanced seller playbook).

Step 6 — Payroll, worker classification and agent liabilities

Brokerages rely heavily on independent contractor agents. Misclassification risk is a top buyer concern: audits, state assessments and retroactive payroll taxes can be deal killers. Review historical treatment of agents, compensation plans, control over agent activities and written agreements.

Practical action

Require the seller produce payroll tax returns, Form 1099‑MISC/NEC records, payroll audits and worker classification analyses.
Include reps and warranties with robust indemnities for payroll tax liabilities and employee benefits obligations.
Consider escrows sized to cover potential reclassification liabilities or obtain rep & warranty insurance to transfer risk.
When reviewing hiring and classification practices, also evaluate AI screening and bias controls for any automated hiring tools (reducing bias in AI screening).

Step 7 — State and international tax issues

Multistate operations create nexus, apportionment and withholding complications. Cross‑border conversions or offices in Canada (as seen in recent conversions) introduce VAT/HST and nonresident withholding considerations.

Practical action

Map the seller’s state and foreign filings, unfiled returns, payroll registrations and sales or HST/VAT registrations.
Assess franchise transfer fees and whether the franchisor’s consent triggers tax consequences.
Plan for state withholding on contingent payments to nonresident sellers.

Step 8 — Tax indemnities, escrow and R&W insurance

Tax indemnities and escrow mechanics are the buyer’s primary protections post‑close. Negotiate:

Specific tax indemnities for known issues (unpaid payroll taxes, unreported commissions).
Survival periods tailored to tax statute of limitations (usually 3 years federal, but longer for some items).
Escrow percentages sized to cover identified and potential tax exposures.
Purchasing reps & warranties insurance to cap out‑of‑pocket exposure when sellers’ balance sheets cannot support large indemnities.

Step 9 — Audit readiness and post‑closing integration

Post‑close alignment of accounting policies influences tax positions on earn‑outs, revenue recognition and payroll. Prepare for IRS interest by maintaining contemporaneous valuations and documenting the allocation rationale.

Practical action

Integrate bookkeeping and chart of accounts immediately to ensure consistent measurement of earn‑outs and commissions. Platform and engineering teams should plan integrations early — building proper developer experience and integration tooling matters (building a DevEx platform).
Document transition services and any post‑closing seller roles with written contracts to preserve tax character (capital vs. compensation). For guidance on small‑team tech and marketing coordination post‑close, see recent practical playbooks (how B2B marketers use AI).
Retain valuation and tax advisory memos as audit evidence supporting goodwill and allocation positions.

Practical checklist: Pre‑signing and closing

Run tax DD: 3–5 years of tax returns, payroll records, 1099s, state filings and supporting schedules.
Obtain a purchase price allocation draft and valuation support for goodwill and intangible assets.
Negotiate structure (asset vs stock) and confirm 338 election strategy early.
Draft clear earn‑out metrics, measurement rules and independent accounting processes.
Obtain indemnities, escrow, and R&W insurance as appropriate.
Confirm tax registrations, franchise transfer approvals and lease assignments.
Prepare Form 8594 and confirm matching allocations with seller at closing.
Plan post‑close integration: accounting, payroll, commission systems, and agent communications. For remote accounting and integration tooling that supports distributed teams, consider modern mobile and cloud tooling for your post‑close team (compact mobile workstations & cloud tooling).

Illustrative allocation example (simple scenario)

To make the allocation concrete, consider a hypothetical $5 million asset purchase of a local brokerage that includes office furniture, computers, a CRM platform, a customer list and goodwill. A defensible split might look like this (illustrative only):

Tangible personal property (furniture, computers): $300,000
Leasehold improvements: $200,000
Acquired software/CRM: $400,000
Customer list/other identified intangibles: $500,000
Goodwill/going concern value: $3,600,000

That allocation would be filed on Form 8594 and drive tax amortization (15 years on the $4.5M of intangibles) and MACRS depreciation on the tangible items. Keep robust support for each line item.

Common buyer mistakes and how to avoid them

Rushing structure decisions: Choosing stock over asset purchase to close faster can cost the buyer the basis step‑up value.
Failing to align allocations: Mismatched Form 8594 allocations are frequent audit triggers.
Ignoring agent classification risk: Underestimating misclassification liabilities often leads to unexpected payroll assessments.
Poorly drafted earn‑outs: Ambiguous metrics and accounting rules cause disputes and unexpected tax treatment. For ideas on measurement and KPI design, see resources on performance dashboards (KPI dashboards).

Advanced strategies for 2026 and beyond

Experienced buyers are using the following tactics to preserve value:

Selective 338 elections: Use 338(h)(10) in private deals where seller tax profile and buyer benefits align.
Asset carve‑outs: Separate out real estate holdings into a different vehicle to optimize depreciation and avoid taxable goodwill inflation.
Tax‑efficient earn‑outs: Structure part of post‑close consideration as non‑compete payments or transitional service fees when appropriate to convert some payments into deductible expenses for the buyer (but watch seller tax consequences).
State tax planning: Preemptively register and apportion multistate operations to avoid surprise nexus audits after consolidation. Also consider platform and hosting choices that affect multistate compliance and data residency (cloud hosting trends).

“We’re thrilled to welcome large teams into new networks,” said a recent franchisor announcement about conversions. For buyers, the tax work begins the moment the LOI is signed.

When to bring in specialists

Complex acquisitions require a coordinated team:

Merger & acquisition tax attorney (deal structure, elections, indemnities)
Transaction CPA/valution expert (purchase price allocation and earn‑out mechanics)
Employment law specialist (agent classification review)
State tax advisor (nexus and apportionment)
International tax expert for cross‑border assets

Final checklist before you close

Confirm structure and elections (asset vs. stock, 338 strategy).
Finalize and sign a mutually agreed purchase price allocation and ensure Form 8594 alignment.
Secure tax indemnities, escrow and R&W insurance as negotiated.
Document earn‑out formulas, measurement accounting policies and independent review procedures.
Transfer or register tax accounts, state registrations and franchise approvals required for operations post‑close.

Conclusion — Treat tax diligence as deal‑maker, not afterthought

In 2026’s market of consolidation and conversions, buyers of brokerages must treat tax due diligence and structuring as central to deal economics. Whether you’re buying 17 offices and 1,200 agents in a franchise conversion or a single regional brokerage, a tax‑aware approach to goodwill, depreciation, earn‑outs, and purchase price allocation protects value and creates predictability. Get the right structuring, lock the allocation, and draft earn‑outs and indemnities that reflect tax realities — then integrate accounting and tax reporting immediately to preserve deductions and minimize audit risk.

Call to action

If you’re negotiating a brokerage acquisition or evaluating conversion opportunities, our team at TaxAttorneys.us helps buyers structure deals to maximize tax value and minimize risk. Contact us for a targeted tax due diligence checklist, model of tax impacts under alternative structures, and bespoke language for purchase agreements and earn‑outs. Don’t sign without a tax plan — schedule a consultation today.

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