The tax assessments of my properties are broken into Land Value and Improvement value. I take the ratio of the Improvement Value to Purchase Price and use that. All rehab costs are added to this as the cost of the land was only in the original purchase.
The tax assessments of my properties are broken into Land Value and Improvement value. I take the ratio of the Improvement Value to Purchase Price and use that. All rehab costs are added to this as the cost of the land was only in the original purchase.
I echo what Bob said. So if you purchase a property for $50,000 and it is assessed at $100,000 with $25,000 being land and improvements $75,000. Then 25% of your purchase at $50,000 is calculated as land, being $12,500. The remaining $37,500 is depreciated. Now if you purchase this property at $50,000 and it is vacant at purchase and you put $20,000 into rehab and repairs and then place it in service after completing work then you will be able to depreciate $57,500. However your might want to segregate some of those costs in order to accelerate your depreciation as well.
Assessment would be one place to look, but you can come up with any alternative allocation, as long as it is justifiable, and you can explain it to the IRS if audited.
I had a multi-unit building that was on a very small piece of land. By today's zoning the land was too small for even a 1 SFH. There would be a multitude of variances needed to build a SFH there. The apt use is a non-conforming use, grandfathered as existing pre-current zoning. Therefore the land land would have less value than if conforming size for a multi-unit. In that case the allocation for the land would be less than normal.
But it could go the other way also. You have a commercial building, but there is lots of extra vacant land included on the parcel for future development or subdivision. That being the case you might want a larger allocation for the land and less for the building.
And the 27.5 yr depreciation IRS schedule for residential property is a minimum there may be personal situations where you might want longer depreciation schedules. If you have all the depreciation you can take, say your at the $25,000 limit, and you planning on selling the property in a relatively short period, you might take a longer depreciation schedule to reduce recapture tax.
Personally I would not use insurance replacement values for IRS depreciation. Often times replacement cost and even market value could exceed your actual purchase price. By IRS rules you can't depreciate more than what you have in the property. One time I bought a 2,000 sq ft house for $3,000 for insurance purposes the replacement value was like $150,000. I'm 100% positive the IRS would not let me depreciate $150,000 on a $3,000 property!
. If you have all the depreciation you can take, say your at the $25,000 limit, and you planning on selling the property in a relatively short period, you might take a longer depreciation schedule to reduce recapture tax.
So I assume you can not carry forward unused depreciation?
Now if you purchase this property at $50,000 and it is vacant at purchase and you put $20,000 into rehab and repairs and then place it in service after completing work then you will be able to depreciate $57,500. However your might want to segregate some of those costs in order to accelerate your depreciation as well.
Kyle, assuming the 20K is to fix the house and not on landscaping why couldn't you depreciate all the 20 K and the portion of the 50 K that is house?
Steve, that $20,000 put into the house can be depreciated even the costs for landscaping along with the improvements portion of the purchase price. However it might be more advantageous to depreciate the appliances that you purchased as a part of that $20,000 and depreciate them over 5 years instead of 27.5 (5 years might be the wrong schedule but that is why I have an accountant). Just keep good records and discuss your options with your accountant.