Basis of depreciation calculation - sale price? tax assessment?

14 Replies

Good morning everyone!

Let me thank you in advance for taking the time to help us newbies!

Question: to calculate depreciation, what price do you use? the county tax assessment, the sale price, or the appraisal price?

2nd Question: what percentage do you use to subtract the land?

The property is a condo in SC; the sale price was $103k; appraisal price was $113k; the county tax assessment was $105,500.

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Originally posted by @Karen Young :

@Wayne Brooks - thank you!

so there is no firm guideline to determine land percentage? you can just pick a reasonable number?

 You must have evidence to back it up. I recommend land comps or the percentage based upon your assessment. Unless you can show that the value is much lower based upon a number of vacant land comps.

Depreciation: Cost of property - land allocation. Take that number and divided it by 27.5. Multiply that number by how many years you have owned the property. That will equal your depreciation amount. 

@Seth Macomber - thank you for your answer. I live in Lihue also. There is a guy starting a meet-up group for RE investors - would you be interested? The next meeting is July 19th. Check out meetup.com. Hope to see you there!

@Steven Hamilton II - let me see if I understand this correctly - determine the price per sq foot of vacant land in the area, then multiply that by the sq feet of land that the condo sits on? Or am I making it too complicated? thank you for your answer.

Originally posted by @Karen Young :

@Seth Macomber - thank you for your answer. I live in Lihue also. There is a guy starting a meet-up group for RE investors - would you be interested? The next meeting is July 19th. Check out meetup.com. Hope to see you there!

@Steven Hamilton II - let me see if I understand this correctly - determine the price per sq foot of vacant land in the area, then multiply that by the sq feet of land that the condo sits on? Or am I making it too complicated? thank you for your answer.

 That pretty much sums it up; however, you'd break out that cost based upon the number of units and the proportion of the total land area.

Originally posted by @Karen Young:

@Steven Hamilton II - let me see if I understand this correctly - determine the price per sq foot of vacant land in the area, then multiply that by the sq feet of land that the condo sits on? Or am I making it too complicated? thank you for your answer.

Karen Young

Yes, you are making this way too complicated.  Go to your county's website and click the Online Services tab.  Select "Search property records" then search by your last name.  The property card for your property should tell you exactly how much of the tax assessed value is attributed to the land and how much to the dwelling structure.  Use the ratio of the value of the dwelling structure to the total value of the property to determine how much of your purchase price is attributed to the dwelling structure.  That amount becomes your depreciation basis.  

Here in Horry and Georgetown counties, the tax assessor assigns a $0 value to land in condo complexes. Makes it easy to justify using the entire purchase price plus settlement costs as my depreciation basis.

@Andy D.  No fees involved.  Just go to the County Assessors website, search for property tax info by address or parcel number, and look at the PDF file.

@Karen Young  Here's an example of the property details I can download from my county - you can get it for any property and they all separate total assessed value for land AND improvements:

https://www.dropbox.com/s/mvh9ks71508csw0/bp-prope...

Your county may differ, and obviously get this when you acquire the property - that ratio is the easiest way to justify whatever land value you claim.

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Originally posted by @Dave Toelkes :
Originally posted by @Karen Young:

@Steven Hamilton II - let me see if I understand this correctly - determine the price per sq foot of vacant land in the area, then multiply that by the sq feet of land that the condo sits on? Or am I making it too complicated? thank you for your answer.

Karen Young

Yes, you are making this way too complicated.  Go to your county's website and click the Online Services tab.  Select "Search property records" then search by your last name.  The property card for your property should tell you exactly how much of the tax assessed value is attributed to the land and how much to the dwelling structure.  Use the ratio of the value of the dwelling structure to the total value of the property to determine how much of your purchase price is attributed to the dwelling structure.  That amount becomes your depreciation basis.  

Here in Horry and Georgetown counties, the tax assessor assigns a $0 value to land in condo complexes. Makes it easy to justify using the entire purchase price plus settlement costs as my depreciation basis.

 Okay, this is what my best guess was on how to do this. Use the latest tax assessors values, then determine the land percentage of the total and adjust for the new price.   The other way I thought of was to use the newly performed appraisal, which as a "Cost Approach", which breaks down the land cost vs structures, then using that ratio, but the land value seems a bit more arbitrary in that section, so I figured the tax assessed value (being performed by the government) gets more weight.

Example:  Tax Assessment shows Total value of $100k:  

  • Land $20k
  • Structures at $80k

This makes the structure to total value at $80k/$100k or 80% of the total.  

If the new purchase price is $80k (congratulations, btw), then the new basis for depreciation is $80k times 80%, or $64k.

@Karen Young  Depreciation can be tricky.  As an investor and enrolled agent I always refer to IRS Publication 946 which sets the procedures for figuring depreciation.  Refer to that publication and a tax professional and you will do fine.