Investor · Columbus, OH · Member since 2015 · 70 posts · 30 votes
Hi. I purchased two properties in 2016 and am having a hard time understanding how to evaluate depreciation. My accountant said that depreciation will be against the value of the land, not the actual home. Is this true? Secondly, when I looked up the county tax assessor websites, I found that my Indianapolis property (which I purchased for $80,000) has a land value of $4,000. And my Kansas City property (also purchased for $80,000) has a land value of $12,000. Can the land values really be this low? And how can depreciating a $4,000 land value over 27.5 years even move the needle? Thank you.
Accountant · Fort Lauderdale, FL · Member since 2013 · 1k+ posts · 753 votes
9y
Land does not get depreciated. You only depreciate the "building/improvement" portion. Subtract the percentage of land as assessed by your county from the amount you bought your house and that is the depreciable basis.
For example: You paid $100,000 for a house. The county assessed the property for $80,000 with 5,000 as land and 75,000 and building. In other words 6.25% of your purchase price is allocated toward land, or in this example, 6,250. So $6,250 is allocated to land and the remaining you can depreciate.
Accountant · Fort Lauderdale, FL · Member since 2013 · 1k+ posts · 753 votes
9y
Land does not get depreciated. You only depreciate the "building/improvement" portion. Subtract the percentage of land as assessed by your county from the amount you bought your house and that is the depreciable basis.
For example: You paid $100,000 for a house. The county assessed the property for $80,000 with 5,000 as land and 75,000 and building. In other words 6.25% of your purchase price is allocated toward land, or in this example, 6,250. So $6,250 is allocated to land and the remaining you can depreciate.
Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes
9y
Ishviyan D. You don't care about high land value as you can't depreciate it. Supposed the property value is the same: a higher land value makes your structure is worth less (not worthless). You've just shot yourself in the foot come tax time.
Cost Segregation Specialist · Naperville, IL · Member since 2016 · 204 posts · 168 votes
9y
What does the county tax assessor say the building value is? I'm guessing it's not $76,000 and $68,000. You depreciate from the building value, the land value is non depreciable. Your actual value will be proportional to the assessed value.
So if the assessed land value is $4,000 and the assessed building value is $36,000 the total assessed value is $40,000, 10% land value, 90% building value. In that case if you paid $80,000 you have $8,000 land value and $72,000 building value.
Sometimes assessed value is way below the actual value which appears to be the case here.
Investor · Milwaukee, WI · Member since 2013 · 1k+ posts · 1k+ votes
9y
LOL. You are from New York so you are used to land scarcity, which leads to high land value. Neither Indianapolis or Kansas City (or Milwaukee) have land scarcity issues, so yes, land value can be quite low. Some land value in Milwaukee is less than $1 right now! You would think people would flock to this low value right? Wrong! You could build a brand new house on free land in some parts of Milwaukee and not get your money back on the sale, which of course explains why no one does it.
The other posters are correct, you are not allowed depreciation on land, but you are allowed depreciation on buildings. You have to spread these out over 27.5 years however (suspiciously similar to a common mortgage term). While it may seem unfair, many business are not allowed to depreciate capital expenses at all, rather gains/losses are figured at sale. So in that perspective, 27.5 years aint so bad.
I am here looking for similar types of answers, only to end up answering yours!!!
Real Estate Consultant · Brookfield, WI · Member since 2014 · 873 posts · 350 votes
9y
@Ishviyan D. I think your question brought up another good point. Something buying inexpensive properties does not alway make sense and you should not look solely at cash flow but look at your tax exposure too.
Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes
9y
I agree with Michael Henry, if you play with small chips you can only make small profits. A lot of new investors are drawn to discount properties, because they seem low risk (because of low price) and strong cash flow. It's actually a counter initutive, the risk goes up as the price goes down. Also, your mortgage principal pay down is smaller and your appreciation potential may be less, both in $% and $$. In a nutshell: buy the highest priced proprty that still shows good cash flow - that's the sweet spot for the long term investor.