Rental condo, 100% of value depreciable?
Durham, NC · Member since 2013 · 502 posts · 215 votes
Rental condo, 100% of value depreciable?
Most Popular Reply
Cost Segregation Specialist · Naperville, IL · Member since 2016 · 204 posts · 168 votes
9yA condo is considered an air-lot. Meaning when you own it you own that physical space in the air containing the condo. This logically follows that the condo itself doesn't have land value since it's not on land it's in the air. Generally the common areas are appurtenances to all the condo owners in the building.
Although later on in Publication 527 (chapter 4) it says condo owners do own a portion of the land. Here's the thing: someone owns the land. So it's either the condo owners or someone else. If the whole building is owned by the condo owners then they'd have pro rata land value. If another entity owns the building it also owns the land and the condo owners own their condos only. So it kinda depends. Check your Deed and Title, there should be info on there describing what you bought. If it's just the unit it's just the unit. If it's the unit and a portion of the land or rest of the building then it's that.
If your assessed land value is zero, you probably just own that unit and everything else is an appurtenance. Generally when land value is assessed at zero it means you don't own the land. It's the same idea with a store in a shopping mall. The store owns everything in the store, but the mall owns the land, the common areas and anything else that isn't inside a store.
So you could do what most everyone does and lump everything in the condo together as residential rental property and depreciate over 27.5 years. Some of the stuff in the condo would be considered tangible personal property depreciated over 5 years. The problem is knowing what's what and how much it cost. Unless you fully remodeled or built it yourself you wouldn't have the cost records so it can be difficult to figure it out without a depreciation expert doing a cost segregation study.
If the property cost over $200K (less land value) you could be looking at $10,000+ in tax savings by correcting the depreciation with cost segregation. PM me if you have any questions about how that works.
12 Replies
- Professional · Santa Barbara, CA · Member since 2016 · 42 posts · 27 votes9y
I suspect that the IRS, being the IRS, would likely not give any weight to your county's tax assessor records. If there is an audit I am guessing if they can make some sort of plausible argument that there is non depreciable land included with your title they will do so.
I can also imagine a scenario where the common areas are owned by some type of non profit HOA where the condo owners don't have alienable ownership right but merely some type of permanent easement. I'm speculating though.
- 9yLance LvovskyPro MemberAccountant · Fort Lauderdale, FL · Member since 2013 · 1k+ posts · 753 votesCheck the other condos in the building and see whether they have a land assessed value. It is hard to imagine that the county is assessed all condos at 0% land value.
- Durham, NC · Member since 2013 · 502 posts · 215 votes9y
I checked. All Condos have only building value, no land value. IRS writes to go into tax record and use the ratio of the land to total value and use this ratio applied to purchase price for tax purposes.
https://www.irs.gov/publications/p527/ch02.html#en...
Look for the section "Separating Cost of Land and Buildings"
- Rental Property Investor · Dallas, TX · Member since 2015 · 501 posts · 504 votes9y
I've wondered that myself, since I own a rental condo. When I look at the assessment on the city's website, the entire assessed value is in the structure, and none in the land. So I think I should be calculating depreciation based on my full purchase price, which means I will probably never turn a profit as far as the IRS is concerned.
It also means I will probably never sell, since the depreciation that would be recaptured is significant.
I have never run my interpretation by a CPA, but my conscience is clear based on how I read the link that @Andreas W. posted. Thanks.
- Cost Segregation Specialist · Naperville, IL · Member since 2016 · 204 posts · 168 votes9y
A condo is considered an air-lot. Meaning when you own it you own that physical space in the air containing the condo. This logically follows that the condo itself doesn't have land value since it's not on land it's in the air. Generally the common areas are appurtenances to all the condo owners in the building.
Although later on in Publication 527 (chapter 4) it says condo owners do own a portion of the land. Here's the thing: someone owns the land. So it's either the condo owners or someone else. If the whole building is owned by the condo owners then they'd have pro rata land value. If another entity owns the building it also owns the land and the condo owners own their condos only. So it kinda depends. Check your Deed and Title, there should be info on there describing what you bought. If it's just the unit it's just the unit. If it's the unit and a portion of the land or rest of the building then it's that.
If your assessed land value is zero, you probably just own that unit and everything else is an appurtenance. Generally when land value is assessed at zero it means you don't own the land. It's the same idea with a store in a shopping mall. The store owns everything in the store, but the mall owns the land, the common areas and anything else that isn't inside a store.
So you could do what most everyone does and lump everything in the condo together as residential rental property and depreciate over 27.5 years. Some of the stuff in the condo would be considered tangible personal property depreciated over 5 years. The problem is knowing what's what and how much it cost. Unless you fully remodeled or built it yourself you wouldn't have the cost records so it can be difficult to figure it out without a depreciation expert doing a cost segregation study.
If the property cost over $200K (less land value) you could be looking at $10,000+ in tax savings by correcting the depreciation with cost segregation. PM me if you have any questions about how that works.
- Investor · Pawleys Island, SC · Member since 2008 · 1k+ posts · 837 votes9y
Andreas,
I am guessing that your condo association holds title to the land and pays the property taxes for the land from the collected condo fees. In this case, you do not have direct ownership but you do have an equitable interest.
I have the same situation with some condos I own as well. Property taxes are assessed only on the dwelling unit.
In my case, I declare the land value as zero and use the purchase price of the condo as the depreciation basis for the dwelling structure.
- Investor · Arnold, MD · Member since 2014 · 57 posts · 24 votes9yWe have a rental condo in Arnold, MD. The assessed land value is almost half the total value of the condo. I feel like this is skewed in the opposite direction. If your county is assessing it at zero, enjoy the blessing and the bigger deduction.
- Cost Segregation Specialist · Naperville, IL · Member since 2016 · 204 posts · 168 votes9y
@Travis Paez that's how it goes sometimes. You own part of the land while the ones assessed at zero do not own part of the land.
- 9yLinda WeygantPro MemberInvestor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes
When I am calculating basis for my clients and the assessor reports land value as $0, then I do not allocate any portion to land and it is 100% depreciable.
Drew Maley is incorrect that the IRS will not take into account the assessor's records. IRS LOVES third party corroboration for anything a taxpayer reports.
- Rental Property Investor · Los Angeles, CA · Member since 2020 · 6 posts · 0 votes5y
I agree 100% with you Paul. If you don’t own the land, how can you depreciate it? This is the crux of the issue and simplifies the answer, ie. almost ALL condo units would not have a land value (which corresponds with the assessor’s valuation too). Well explained!
- Member since 2020 · 1 post · 0 votes3y
Quote from @Paul Caputo:
A condo is considered an air-lot. Meaning when you own it you own that physical space in the air containing the condo. This logically follows that the condo itself doesn't have land value since it's not on land it's in the air. Generally the common areas are appurtenances to all the condo owners in the building.
Although later on in Publication 527 (chapter 4) it says condo owners do own a portion of the land. Here's the thing: someone owns the land. So it's either the condo owners or someone else. If the whole building is owned by the condo owners then they'd have pro rata land value. If another entity owns the building it also owns the land and the condo owners own their condos only. So it kinda depends. Check your Deed and Title, there should be info on there describing what you bought. If it's just the unit it's just the unit. If it's the unit and a portion of the land or rest of the building then it's that.
If your assessed land value is zero, you probably just own that unit and everything else is an appurtenance. Generally when land value is assessed at zero it means you don't own the land. It's the same idea with a store in a shopping mall. The store owns everything in the store, but the mall owns the land, the common areas and anything else that isn't inside a store.
So you could do what most everyone does and lump everything in the condo together as residential rental property and depreciate over 27.5 years. Some of the stuff in the condo would be considered tangible personal property depreciated over 5 years. The problem is knowing what's what and how much it cost. Unless you fully remodeled or built it yourself you wouldn't have the cost records so it can be difficult to figure it out without a depreciation expert doing a cost segregation study.
If the property cost over $200K (less land value) you could be looking at $10,000+ in tax savings by correcting the depreciation with cost segregation. PM me if you have any questions about how that works.
@Paul Caputo what do you mean by "by correcting the depreciation with cost segregation"?
- 3yAdrienne RammohanPro MemberInvestor · Washington, DC · Member since 2022 · 121 posts · 143 votesIncredibly useful link @Andreas W.. Not just for condos, but had some great guidance on depreciation that I hadn't seen before.
Quote from @Andreas W.:
I checked. All Condos have only building value, no land value. IRS writes to go into tax record and use the ratio of the land to total value and use this ratio applied to purchase price for tax purposes.
https://www.irs.gov/publications/p527/ch02.html#en...
Look for the section "Separating Cost of Land and Buildings"
Join the conversationCreate a free account to reply, vote on answers and follow this thread.