The Importance of Land Valuation

[Julio Gonzalez]

Did you know that it can be very beneficial to get a land valuation BEFORE you buy a property?

We all know that land does not depreciate as it can never be “used up”. When buying a property, the purchase price is split between the value of the land and the value of the depreciable property such as buildings, site work, etc. The building will depreciate over time while the land value doesn’t change for tax purposes.

Cost segregation is a great way to maximize your depreciation. However, cost segregation companies are not allowed to provide the land value. Therefore, you should obtain the land value prior to the cost segregation study and prior to purchasing the property. A great place to start is with the county tax assessor or to hire a valuation professional to appraise the property at the time of purchase.

One key question to consider is when you plan on selling the property. If you plan to sell the property in the near future, you may want to have a high land value so there’s a lower depreciable property value which would result in a smaller capital gain when you sell the property. However, if you intend to hold the property long-term or plan to pass it down to the next generation, you may want a smaller land value with a higher value to depreciable property since you won’t trigger a gain.

One popular method in real estate to defer capital gains is the 1031 exchange. Since your capital gains are likely to increase (as real estate typically appreciates), it’d be preferable to have a higher land value since depreciation over time eats away at your total cost basis. Since land doesn’t depreciate, the cost basis would be larger at the time of the 1031 exchange which would allow you to get a larger property.

Have you or your clients used land valuation as a real estate strategy?