Depreciation of land vs. building

16 Replies

I bought several properties this year and I'm trying to figure out how to get the highest depreciation deduction possible. I do my taxes myself and plan to continue to do so.

The value of the land, according to the tax assessor, is generally a very high percent of the property's value. Here is an example of a property that I've bought:

Duplex:
Purchase price - $59.5K
Tax assessment - $63K ($26K for land, $37K for building)
Appraisal - $67K total value

The best I can come up with is to take the $26K for land and divide this by the $67K appraised value, to get 38.8% of the value allocated to land. This will allow me to depreciate 61.2% of the $59.5K purchase price, or $36.4K. I'll allocate a few thousand to appliances, which can be depreciated more quickly, and the rest to the building itself. Is there any way I can justify depreciating any more than 61.2% of the purchase price?

I have another property that I purchased for $72.6K, and did not have an appraisal. The tax assessment is $77K with $26K going towards land. This property has two nice houses on it and I'm sure the market value is upwards of $100K. For this one, can I use some comps to determine the total value and still use the $26K as the value of the land?

I'd really appreciate some creative ideas on how to increase my depreciation deductions. Thanks!

~MJ

First, this is a discussion you should be having with your CPA.

You might look into cost segregation. If Al Alielo is to be believed, you can identify all the component costs for the improvements and add those up to come up with the value for the improvements. That might result in a very low or even zero value for the land. No idea if this is realistic, possible, or legal. Again, a good topic for a discussion with your CPA.

My CPA is myself, and I'd like to keep it that way if at all possible.

I hear cost segregation is very expense, as in the $10K range. Since some of my properties are in the $60K range, it probably doesn't make sense. I do like the idea of backing out the building costs from the purchase price and assigning whatever is left to the land.

bought several properties this year and I'm trying to figure out how to get the highest depreciation deduction possible. I do my taxes myself and plan to continue to do so.
Do you do your own surgeries as well? I am of the opinion that some tasks are better left to the professionals with proper experience and certifications and a CPA is no different.
The fact that you are asking this question should be a red flag that you need a CPA.

If you are simply trying to avoid the costs of a CPA, it is my opinion that the costs of such a professional are paid for in the deductions you get and the mistakes you avoid rather than going at it alone.

As for cost segregation, that is usually left for commercial properties and not single family or duplex units. Also, keep in mind that the more you depreciate, the more you recapture in the end.

I strongly encourage you to seek professional guidance on this matter from an experienced RE CPA.

To have a company come in and do cost segregation can be very expensive.

As Jon mentioned Al Alielo has a very comprehensive course on all matters regarding real estate investing and tax issues.

He spends a ton of time quotes chapter and verse regarding how to "componentize" the pieces of the physical structure to effectively accelerate the depreciation.

My CPA already used the approach outlined by Alielo when we found him.

John Hyre has a similar course... not quite as comprehensive but is does the same job.

On average you could expect to accelerate your depreciation from the 27+ years to less then 20 years.

How do I learn if I don't ask the question?

I do my own taxes partially to save the cost of the accountant but mostly because I'm one of those odd people who loves doing taxes and will spend hours and hours researching how to do them correctly. I don't think taxes for 5 residential rental properties are really that complicated. Depreciation is the most complicated part.

Pay the CPA for consultation then, so you can learn. Or have the CPA do the first year's taxes, after which all of the depreciation amounts and durations will have already been set, so that you can do subsequent years.

If the paid CPA errs in any way, they will stand beside you at the audit. I don't think any of the forum members will do that ...

Mariah, I was in no way attempting to be offensive but to open yoru eyes to the fact that these things are better left to the pros.
You like doing taxes, great! Keep it as a hobby and do your personal. Leave the complicated stuff up to the pro who, as Steve mentioned, will be by your side during an audit.
One mistake could easily cost you the fee to a CPA and then some. Why risk it! Spend your time doing deals and making money, have your CPA spend his/her time helping you keep more of it!

No offense taken.

I do intend to get a consult with a CPA, as Steve suggested. It has been on my to-do list for a while. I just don't see myself ever completely delegating the task of return prep to a CPA.

One reason my question came up is that I am currently analyzing properties to determine how much to offer. The land's percent of value for depreciation purposes is an input to my spreadsheet, and changing this from 40% to 20% makes a big difference in the IRR. I was not expecting someone on this forum to tell me exact values to use on my tax return, but rather, to tell me if I can expect to find a way to allocate less to the land than what I outlined in the original post.

I was not expecting someone on this forum to tell me exact values to use on my tax return, but rather, to tell me if I can expect to find a way to allocate less to the land than what I outlined in the original post.
Recalling a conversation with my CPA a year or two back, he mentioned that he can increase/decrease the allocation to land, but there were some consequences of which I do not recall.

As to the cost segregation, not only is it expensive, but it is not a fit for your portfolio at this time (in my opinion) Disclaimer: Not to be construed as legal or financial advice.

This is a key statement:

Also, keep in mind that the more you depreciate, the more you recapture in the end.

The tax savings associated with depreciation isn't truly savings. Its a loan. You have to repay it, or most of it, when you sell. So, yes, there's more money in your pocket right now if you have more depreciation, but more depreciation recapture tax when you sell.

With a CPA you're paying not only for knowledge but experience. When I interviewed my current CPA, we spent time discussing our full income situation. He identified several areas where I was totally unaware of a possible deduction. If you're unaware of something, how can you study up on it? In addition, he was able to describe not only how he dealt with some of the complexities of tax law but also how he had actually fought with the IRS in tax court and prevailed.

When I interviewed my current CPA, we spent time discussing our full income situation. He identified several areas where I was totally unaware of a possible deduction. If you're unaware of something, how can you study up on it?
Very good point and just strengthens my opinion that you should be using a CPA for your taxes.

My suggestion would be that although professional guidance would be prudent. If you enjoy doing your own taxes then you may want to invest in a Property Managment/Tax software program that will calculate all the items and percentages plus depreciation etc turnkey. Mine does everything for me then prints out a copy that I give to my CPA -which in your case would be you!!!

Originally posted by Matt Mathews:
My suggestion would be that although professional guidance would be prudent. If you enjoy doing your own taxes then you may want to invest in a Property Managment/Tax software program that will calculate all the items and percentages plus depreciation etc turnkey. Mine does everything for me then prints out a copy that I give to my CPA -which in your case would be you!!!


I like that idea. Does anyone have any feedback on Quicken Rental Property Manager, or suggestions for others?

Does Al Aliello have a book that I can buy, or just courses?

Many items paid on settlement can be included in your calculation for basis to increase the deduction. Check out IRS pub 551.

Chapter 6 of Every Landlord's Tax Deduction Guide by Stephen Fishman has a really good explanation of segmented depreciation and how you can go about doing it.

I'm sharing a list of common assets with IRS approved class lives that you can use if you want to segment the deductions (use cost segregation, minus the cost segregation study). http://www.trexglobal.com/assetlist.pdf

Hope that helps!

Mariah, I would simply use the tax assessor's value for the buildings and depreciate that. That gives you a figure that is documented and arguably has been arrived at by a professional.

There is no advantage to higher depreciation. You have to pay taxes on all the reclaimed depreciation when you sell, and it will likely be for a higher amount than if you had simply paid taxes on the income from the rentals as you received it.

Check the government's instruction booklet for depreciation. Sometimes they allow accelerated depreciation (if you can understand their instructions, which are written in god only knows what... it isn't English.)

Everyone keeps pointing out that depreciation is a loan, but I don't really intend to ever sell these properties. I know plans can change, but I feel fairly confident that I'll either a) buy and hold until I die and pass them on to my kids or b) trade up to something larger via 1031 exchange. Either way, I'm better off maximizing my depreciation now.

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