How to get building value for rental depreciation (tax purpose)
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Accountant · Phoenix Metro · Member since 2018 · 22 posts · 13 votes
4yIn case anyone is wondering, it isn't as simple as looking at county assessor sites and using the land value they have assessed. The IRS isn't ever reasonable that's why I, and many other CPAs, use the 15%/85% rule. It has been 'blessed' by the IRS over hundres of thousands of returns that I have prepared/reviewed/signed across the 3 different firms I have worked at.
Essentially, you value the entire property at FMV at the date of conversion to a rental property. Using zillow, realtor, comp sales in the area, etc. are all 'blessed' methods that I have used. Then multiply that FMV by 85% to assign a value to the dwelling with the remainder going to land. The dwelling is depreciated over 27.5 years - if residential - while the land value is left alone. A good thing to consider is a Cost Segregation Study ANY TIME you buy real estate because it allows you to take the dwelling value and further differentiate that value between various components of the dwelling, some of which may be eligible for a shorter depreciation time than 27.5 years for residential and 39 years for commercial.
Feel free to shoot me a message to set up a free phone consultation.
11 Replies
- Real Estate Agent · Gilbert, AZ · Member since 2020 · 36 posts · 29 votes4y
Hey @Bei He, I am an Arizona Realtor, I can look up the land value for you on the Maricopa County assessor's site if you want to shoot me the address.
- Real Estate Agent · Chandler, AZ · Member since 2022 · 216 posts · 156 votes4y
@Jeremy Bottlinger can help you with that. Also I have an appraiser on my team, that would be a good question for him, I will asks now and get back with you.
-Andrew
- Accountant · Phoenix Metro · Member since 2018 · 22 posts · 13 votes4y
The safe harbor that I use - 14 years and no IRS audits - is 15% to land and 85% to the home. Make sure you use FMV as of the date the home was converted to a rental rather than the purchase price on closing date. Using the estimates from Realtor.com/zillow/etc. are acceptable. Shoot me a message if you want to talk over a phone call - no charge. My expertise as a CPA is Construction and Real Estate.
Not that you wouldn't but you need to take depreciation expense - some people misinterpret the tax law and don't take depreciation because they don't want to pay taxes on depreciation recapture later when the property is sold. Then you screw yourself twice: you didn't take depreciation BUT you still have to pay taxes on what would have been the depreciation expense over all those years.
Glad your reaching out for advice- so many tax issues that moght trip you up
- Member since 2020 · 404 posts · 235 votes4y
Im actually very curious about this too in regards to what value to use for depreciation. Some places say it is the purchase price substracting land which you can find in most county property tax form or assessor site. This I would think is conservative if you purchased your property decades ago, the property has gone way up in value and so has construction cost.
- 4yBei HeRental Property Investor · San Jose, CA · Member since 2018 · 37 posts · 10 votesOP
Thanks everyone! At the end, I found the land value in my appraisal report which is $199k, then used the purchase value - $199k as building value to depreciate. Because my appraisal = purchase price, and I rented it out right away. so should be all good no need adjust meant =)
- Accountant · Phoenix Metro · Member since 2018 · 22 posts · 13 votes4y
In case anyone is wondering, it isn't as simple as looking at county assessor sites and using the land value they have assessed. The IRS isn't ever reasonable that's why I, and many other CPAs, use the 15%/85% rule. It has been 'blessed' by the IRS over hundres of thousands of returns that I have prepared/reviewed/signed across the 3 different firms I have worked at.
Essentially, you value the entire property at FMV at the date of conversion to a rental property. Using zillow, realtor, comp sales in the area, etc. are all 'blessed' methods that I have used. Then multiply that FMV by 85% to assign a value to the dwelling with the remainder going to land. The dwelling is depreciated over 27.5 years - if residential - while the land value is left alone. A good thing to consider is a Cost Segregation Study ANY TIME you buy real estate because it allows you to take the dwelling value and further differentiate that value between various components of the dwelling, some of which may be eligible for a shorter depreciation time than 27.5 years for residential and 39 years for commercial.
Feel free to shoot me a message to set up a free phone consultation.
- 4yBasit SiddiqiBusiness MemberAccountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
Quote from @Jeremy Bottlinger:
In case anyone is wondering, it isn't as simple as looking at county assessor sites and using the land value they have assessed. The IRS isn't ever reasonable that's why I, and many other CPAs, use the 15%/85% rule. It has been 'blessed' by the IRS over hundres of thousands of returns that I have prepared/reviewed/signed across the 3 different firms I have worked at.
Essentially, you value the entire property at FMV at the date of conversion to a rental property. Using zillow, realtor, comp sales in the area, etc. are all 'blessed' methods that I have used. Then multiply that FMV by 85% to assign a value to the dwelling with the remainder going to land. The dwelling is depreciated over 27.5 years - if residential - while the land value is left alone. A good thing to consider is a Cost Segregation Study ANY TIME you buy real estate because it allows you to take the dwelling value and further differentiate that value between various components of the dwelling, some of which may be eligible for a shorter depreciation time than 27.5 years for residential and 39 years for commercial.
Feel free to shoot me a message to set up a free phone consultation.
Just because other accountant's do it does not make it right.
Also, the IRS not auditing the return does not mean that you got the IRS's 'blessing'.
Using 85% / 15% for building land ratio is lazy and incorrect.
Basit Siddiqi CPA4.979 Reviews - Accountant · Phoenix Metro · Member since 2018 · 22 posts · 13 votes4y
Quote from @Basit Siddiqi:
Quote from @Jeremy Bottlinger:
In case anyone is wondering, it isn't as simple as looking at county assessor sites and using the land value they have assessed. The IRS isn't ever reasonable that's why I, and many other CPAs, use the 15%/85% rule. It has been 'blessed' by the IRS over hundres of thousands of returns that I have prepared/reviewed/signed across the 3 different firms I have worked at.
Essentially, you value the entire property at FMV at the date of conversion to a rental property. Using zillow, realtor, comp sales in the area, etc. are all 'blessed' methods that I have used. Then multiply that FMV by 85% to assign a value to the dwelling with the remainder going to land. The dwelling is depreciated over 27.5 years - if residential - while the land value is left alone. A good thing to consider is a Cost Segregation Study ANY TIME you buy real estate because it allows you to take the dwelling value and further differentiate that value between various components of the dwelling, some of which may be eligible for a shorter depreciation time than 27.5 years for residential and 39 years for commercial.
Feel free to shoot me a message to set up a free phone consultation.
Just because other accountant's do it does not make it right.
Also, the IRS not auditing the return does not mean that you got the IRS's 'blessing'.
Using 85% / 15% for building land ratio is lazy and incorrect.Lazy and incorrect? Then what is the correct way of doing it? You just pop on and take shots at people without providing any information. I will gladly put my abilities against yours any day.
I teach construction and RE seminars in AZ - I think I know a thing or two about what I am doing. I never said 85/15 is the perfect way to do it - it the most cost effective way to do it. Proper way is to pay for a valuation at the time you are converting your property to a rental.
Thanks for making this community friendly and collaborative.
- 4yAllie PfannenstielPro MemberReal Estate Agent · Scottsdale, AZ · Member since 2017 · 159 posts · 59 votes
I like to do cost segregation studies on my rentals to get accelerated depreciation. Talk to your accountant to see if that is right for you.
- Investor · New York City, NY · Member since 2016 · 2 posts · 1 vote4y
Quote from @Basit Siddiqi:
Quote from @Jeremy Bottlinger:
In case anyone is wondering, it isn't as simple as looking at county assessor sites and using the land value they have assessed. The IRS isn't ever reasonable that's why I, and many other CPAs, use the 15%/85% rule. It has been 'blessed' by the IRS over hundres of thousands of returns that I have prepared/reviewed/signed across the 3 different firms I have worked at.
Essentially, you value the entire property at FMV at the date of conversion to a rental property. Using zillow, realtor, comp sales in the area, etc. are all 'blessed' methods that I have used. Then multiply that FMV by 85% to assign a value to the dwelling with the remainder going to land. The dwelling is depreciated over 27.5 years - if residential - while the land value is left alone. A good thing to consider is a Cost Segregation Study ANY TIME you buy real estate because it allows you to take the dwelling value and further differentiate that value between various components of the dwelling, some of which may be eligible for a shorter depreciation time than 27.5 years for residential and 39 years for commercial.
Feel free to shoot me a message to set up a free phone consultation.
Just because other accountant's do it does not make it right.
Also, the IRS not auditing the return does not mean that you got the IRS's 'blessing'.
Using 85% / 15% for building land ratio is lazy and incorrect.So what's your recommendations?
- 4yMichael PlaksPro MemberTax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
85/15 rule or 80/20 rule are certainly an incorrect approach - UNLESS you apply it to a specific and uniform geographical area where a particular ratio is commonly accepted. Rural areas in the Midwest, for example.
There are many RE markets where land is more valuable than improvements - think CA. Within most major metro areas, the ratio could vary anywhere from 10% to land in the distant suburbs to 80% to land in the hot spots.
The correct answer to this question was provided by @Yonah Weiss here: https://www.biggerpockets.com/...
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