Purchase Price Adjustments capture the change in value of an asset

Asset

In financial accounting, assets are economic resources. Anything tangible or intangible that is capable of being owned or controlled to produce value and that is held to have positive economic value is considered 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

Promissory note

A promissory note is a negotiable instrument, wherein one party makes an unconditional promise in writing to pay a determinate sum of money to the other , either at a fixed or determinable future time or on demand of the payee, under specific terms.Referred to as a note payable in accounting, or...

 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.

Federal Tax Implications

A Purchase Price Adjustment is not included as gross income under the U.S. tax code. 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).