From a tax perspective, cross-purchase agreements are generally preferable. The other owners receive in the acquired shares the equivalent of a “stepped-up base” because their basis for these shares is determined by the price paid, which represents the current fair value. The higher base will reduce their capital gains if they sell their interest on the street. Even if other homeowners finance the purchase with life insurance, insurance revenues are generally tax-exempt. A purchase and sale contract is a legally binding contract that defines how a partner`s participation in a business can be reassigned if that partner dies or otherwise leaves the business. Most of the time, the purchase and sale contract provides that the available share is sold to the remaining partners or to the partnership. In addition, traditional accounting practices remain largely based on the historical principle of costs. This principle requires that assets, with the exception of certain investments, generally remain on the company`s books at historical costs. In particular, when assets are depreciated or depreciated, exhale or, in some cases, when they suffer a loss of value, the amount recorded is never increased when the fair value of the assets is increased. In short, the amounts for assets in the entity`s accounting documents (i.e., book value) do not reflect fair value, but rather reflect the initial cost or a lower amount. In fact, for buildings, the gap between book value and fair market value can be extreme.
As buildings age, they are depreciated by a process called “damping.” But in reality, buildings generally appreciate value. Thus, over time, the two amounts actually move in opposite directions, which increases the gap. As a general rule, buy-and-sell agreements achieve these objectives by requiring or authorizing the remaining business or owners to acquire the shares of a dying, disabled or leaving homeowner. You can also grant the company or other owners a right to retain if an owner wants to sell his shares.