Should depreciation cost basis be put in an offer to purchase?

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Should depreciation cost basis be put in an offer to purchase?

Andrew Bober
Madison, WI · Member since 2016 · 2 posts · 0 votes

I had an unfortunate experience with our buyer's agent in OH recently.  The agent walked away from me and the deal when I asked him to include time limits in an offer, as well as a price breakdown to establish depreciation cost basis.

  1. Land
  2. Building
  3. Personal Property
  4. Land Improvements

Is what I asked unreasonable?   I was told "It's not done that way here."

Does anyone else put the cost breakdown in their offers?

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Natalie KolodijBusiness Member
Moderator
Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
7y
Originally posted by @Bill B.:

Not done that way in Nevada or Minnesota. Who’s hiring the expert that’s assigning the values? Is the seller allowed to just accept one part of your offer and sell you only the personal property or only the building but not the land? It’s either one offer or 4 offers. Who’s paying the fines and penalties if the IRS doesn’t agree with the numbers?

You can do whatever you want after you own it. but unless this is a multi-million dollar multi why would you bother?

Just use a standard 80/20 building land unless it's part of a HOA where you don't own anything outside your walls then use 100%.

Yes, I’ve heard of cost segregation, no I wouldn’t bother on a sub $500k property. Most properties will show a depreciation/paper loss for at least 7-10 years without it so you’re just carrying forward losses unless you plan to sell in 3-5 years btu then your trapped in 1031’s forever or paying 25% depreciation recapture instead of 15% capital gains, you’ve actually increased your taxes. 

Using "Stadnard 80/20" won't hold up in any type of IRS Audit or examination. 

There are 6 ways the IRS will accept for determining appreciable basis on a property- an arbitrary allocation isn't really one of them. 


And a good deal of properties that have HOAs/ Condos/ ect.....still technically own a prorated portion of land and still get alllocated. 

Utilize the tax assessors website for the land to building values, or your formal appraisal. 

Your tax professional is who should help you establish this also, not the realtor. 

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  • Bill B.
    Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
    7y

    Not done that way in Nevada or Minnesota. Who’s hiring the expert that’s assigning the values? Is the seller allowed to just accept one part of your offer and sell you only the personal property or only the building but not the land? It’s either one offer or 4 offers. Who’s paying the fines and penalties if the IRS doesn’t agree with the numbers?

    You can do whatever you want after you own it. but unless this is a multi-million dollar multi why would you bother?

    Just use a standard 80/20 building land unless it's part of a HOA where you don't own anything outside your walls then use 100%.

    Yes, I’ve heard of cost segregation, no I wouldn’t bother on a sub $500k property. Most properties will show a depreciation/paper loss for at least 7-10 years without it so you’re just carrying forward losses unless you plan to sell in 3-5 years btu then your trapped in 1031’s forever or paying 25% depreciation recapture instead of 15% capital gains, you’ve actually increased your taxes. 

    0Reply
  • Natalie KolodijBusiness Member
    Moderator
    Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
    7y
    Originally posted by @Bill B.:

    Not done that way in Nevada or Minnesota. Who’s hiring the expert that’s assigning the values? Is the seller allowed to just accept one part of your offer and sell you only the personal property or only the building but not the land? It’s either one offer or 4 offers. Who’s paying the fines and penalties if the IRS doesn’t agree with the numbers?

    You can do whatever you want after you own it. but unless this is a multi-million dollar multi why would you bother?

    Just use a standard 80/20 building land unless it's part of a HOA where you don't own anything outside your walls then use 100%.

    Yes, I’ve heard of cost segregation, no I wouldn’t bother on a sub $500k property. Most properties will show a depreciation/paper loss for at least 7-10 years without it so you’re just carrying forward losses unless you plan to sell in 3-5 years btu then your trapped in 1031’s forever or paying 25% depreciation recapture instead of 15% capital gains, you’ve actually increased your taxes. 

    Using "Stadnard 80/20" won't hold up in any type of IRS Audit or examination. 

    There are 6 ways the IRS will accept for determining appreciable basis on a property- an arbitrary allocation isn't really one of them. 


    And a good deal of properties that have HOAs/ Condos/ ect.....still technically own a prorated portion of land and still get alllocated. 

    Utilize the tax assessors website for the land to building values, or your formal appraisal. 

    Your tax professional is who should help you establish this also, not the realtor. 

    Podcast Guest on Show Pay Less Tax to the IRS This Year With THESE Real Estate Tax Strategies
    Kolodij Tax & Consulting
    WebsiteView Page
    2Reply
  • Andrew Bober
    OP
    Madison, WI · Member since 2016 · 2 posts · 0 votes
    7y

    Thank you for the feedback @Bill B. & @Natalie Kolodij.  It sounds like I should touch base with our accountant to see how close we where to what he would suggest.  To calculate each category we applied the ratio of land/building provided by the city assessor to the price in our counter offer.  We took land improvements out of the value of the land and personal property out of the value of the building.

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  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    7y

    @Andrew Bober Yeah, while it doesn’t really affect the seller, it provides little value to you and will just make sellers uncomfortable. 

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