How to determine building value for depreciation
I'm in a bit of a quandary at the moment. I purchased a property in pretty bad shape for about $1 million last year and spent about $500,000 on what ended up being a MAJOR rehab project. The city assessed the value of the property when I bought it at $1 million, but only $100,000 was assessed to the building, and $900,000 to the land.
So now my CPA tells me that the IRS goes by the city assessed values to determine the PERCENTAGE of land vs building value. So if you purchased at $1,000,000, and now the property is worth $1,500,000, the IRS will allow 10% of that $1,500,000 to be depreciated ($150,000), while the rest cannot since it goes to land value. Am I the only one that thinks this is ridiculous? The city and county of Honolulu is notorious for unfair land/building ratio valuations.
My view is that I should ignore my CPA, and go with the REPLACEMENT VALUE the insurance company assessed on the building. The insurance company put the replacement value of the building at $660,000.
Or, should I take the initial purchase price, somehow subtract a fair value for the building BEFORE the rehab (let's say $200,000), and then add the labor and material that went into the project (approx $500,000) giving me a building value of $700,000 to depreciate?
Then there is the appraisal (not sure if this can be used for depreciation because the appraiser never splits land and building values), which came out at $2,140,000. But how do I allocate the building value out of that?
As you can see, I have no idea how to determine my new basis going forward. I just completely disagree with my CPA that I should use the "ratio" the city and county uses to determine the building value.
Thanks in advance for any advice and help!