Land vs. Improvement Values

4 Replies

I got a good one here. I'm going to use some easy numbers.

I purchased a duplex for $200,000 in July. The prior owners had the property forever and it was assessed at a total of $150,000, $50,000 towards land, and $100,000 towards improvements.

I took the values with my accountant at the time: 33% is land, 66% is improvements. So I can depreciate $133,333 as improvements ($200,000 x 66.6%).

Jump forward 9 months (now), the county got around to updating their website with the assessment values of our purchase (they are just REALLY REALLY slow), they now say that the land is worth $50,000 and the improvements are worth $150,000. They didn't adjust the land basis and say that all of the increase is towards improvements. Naturally I want the extra $16,667 in depreciation over 27.5 years.

My accountant said option 1 would be to re-file last years taxes with correct amount. I'm not a big fan of refiling since we are a multi-member llc and it would be a big mess for everyone. I saw online you can file IRS form 3115, does anyone have experience with a situation like this in changing the depreciation amounts?

I am interested to hear what Steve will say as well. I would definitely agree that the normal path would be to refile. Another note would be for future reference. From my understanding you need to apply a reasonable process to determine land value. I normally do what you have done by using the assessed value ratio. However if you have one like that and it is off base from you normal range I imagine you could use that methodology. For example if most of the properties in a section of town where you buy have a land to total price ratio of 20%-25% you can reason that it would also apply to your current property purchase even though the ratio for that would be 33%.

I just looked at irs form 3115. It seems to be for changing your method which you don't really seem to be doing. In either case I would assume you would still need to file an ammendment to modify for that property. Just my thoughts, with absolutely no experience :)

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