Depreciation building value

[Jeremiah O'Neill]

Last year I converted my primary residence into a rental property.   We purchased the home for $295k in 2006 and it lost value over the next few years, now at around $250k.  Per the IRS, I need to use the $250k for depreciation purposes.

In order to determine the ratio of the improvements to the land I looked at my assessors website where they say that the land is worth $170k and the improvement $50k.  That puts the land at 77% of the value and my depreciable amount at $57k! The home is a 1000 sf ranch and according to my insurance policy has about $150k replacement cost.  Question is am I stuck with using the $57K or can I justify a higher amount.

Thanks

[Rob Beland]

Hi @Jeremiah O'Neill! Leominster here. For tax purposes, you want to get as much of the value into the improvements as you can. You will need to justify whatever number you decide on so the best thing to do is look at vacant land comps in your area and use a similar value for an average of nearby comps. It's likely being in Cambridge that land values are in fact high. Don't always go by the Assessor's office. They use a completely different set of data to come up with their annual valuations. I just checked on a property I own here in Leominster,a similar sized ranch (1,088 SF). Assessors office has it valued at $179K with the land being worth $65K. I'd say in my case that's a fairly accurate value on the land although I converted it to an investment property about 10 years ago so the numbers were much different then for my basis. I would likely push down that $65K if I was putting it into service today if even by 10-15% to help a bit. ARV on my house is about $200K right now as a comparison. You could honestly go down 15% off of the ARV of a similarly valued piece of land in your area and what is the harm done? I know that when it comes to an audit, the IRS requires 85% of audited expenses to be accounted for as an example so you are still within that allowed 15% margin of error so to speak. You gave it your best shot coming up with a value. Maybe you will find comps in your area are well below that $170K value the Assessors office puts on your land. At the same time, you may find that house lots in that neighborhood are selling at a premium. Good luck...