Accountant is using a weird depreciation method, is he right?

12 Replies

He tells me the appraised amount of the structure (not including land, just the house) divided by 27.5 is NOT the depreciation method.

He said the purchase price is my  basis and that...

Depreciable basis = basis * land value percentage.

Land value % = appraised land value when the rental was put into service divided by appraised total value when put into service. 

Is he right??

@Jack B.

It depends if he is right. I try to put in my purchase sale agreement the land and structure value.  I think you may be mixing up the 27.5 year depreciation with how you arrive at the basis to depreciate.  

Basis= total paid-land value

If you made improvements and repairs and carried it for a while it muddies the waters a bit. 

Without those numbers he is giving you a way that can be defended in court. 

Without bifurcation of the depreciating improvements and assuming this is residential not commercial he should be doing the depreciation on the 27.5 year. 

Not sure of the total situation your in. Get @Lance Lvovsky , @Ashish Acharya , @Michael Plaks    @Brandon Hall , pay one of them to look it over the details before you use your guy. 

A little confusion, maybe......
(Basis Minus land value)/27.5.

@Jack B.

First of all, 

"Land value % = appraised land value when the rental was put into service divided by appraised total value when put into service." That is not right. You only use appraised value if the FMV of the property was less than the adjusted basis of the property. I do not think that is the case as the RE market is good.

If you ignore that mistake, with his calculation, he is determining the basis of the land (Depreciable basis = basis * land value percentage.).  The depreciable basis of the property will be total adjusted basis - his " depreciable basis". 

@Jack B. ,  Consistence with my reply to an earlier post, I think it is worth extending you return man. You dont owe any more tax with the extension. 

The appraisal has nothing to do with depreciation.  It is (Basis-land value)/27.5 as @Wayne Brooks stated. 

The appraisal should only have been used to determine the land value percentage of the total purchase price.

Back to the stacks of tax returns.

Originally posted by @Ashish Acharya :

@Jack B. , 

First of all, 

"Land value % = appraised land value when the rental was put into service divided by appraised total value when put into service." That is not right. You only use appraised value if the FMV of the property was less than the adjusted basis of the property. I do not think that is the case as the RE market is good.

If you ignore that mistake, with his calculation, he is determining the basis of the land (Depreciable basis = basis * land value percentage.).  The depreciable basis of the property will be total adjusted basis - his " depreciable basis". 

@Jack B. ,  Consistence with my reply to an earlier post, I think it is worth extending you return man. You dont owe any more tax with the extension. 

You're right. The FMV was higher than the tax assessors appraisal. So what I'm hearing is that this guy is wrong after all? Ashish I wish you would take me as a client, you're the only accountant I've ever talked to that actually knows what he is doing...

Originally posted by @Steven Hamilton II :

The appraisal should only have been used to determine the land value percentage of the total purchase price.

Back to the stacks of tax returns.

Well now this seems to agree with the accountant I hired...? I always thought the depreciation on a rental (most of mine were primary residences turned into rentals) was just the structure value / 27.5

Originally posted by @James W. :

The appraisal has nothing to do with depreciation.  It is (Basis-land value)/27.5 as @Wayne Brooks stated. 

 This is what I've been doing for YEARS!! The Chartered Accountant I hired said it's wrong and told me HIS method...

If he is only using the appraisal for the value of the land portion, that is probably fine.  If your basis is $300k and the land value is $100k (per appraisal), you would be able to depreciate $200k.  

You need some sort of way to determine the land value so the appraisal would work. In a situation where you don't have an appraisal, you will need to determine the value using other means.  

I was initially thinking the appraised value of the property was being used, but using value of the land should be fine to determine what you are not able to depreciate.

Originally posted by @James W. :

If he is only using the appraisal for the value of the land portion, that is probably fine.  If your basis is $300k and the land value is $100k (per appraisal), you would be able to depreciate $200k.  

You need some sort of way to determine the land value so the appraisal would work. In a situation where you don't have an appraisal, you will need to determine the value using other means.  

I was initially thinking the appraised value of the property was being used, but using value of the land should be fine to determine what you are not able to depreciate.

 He is using the tax assessed value/appraisal.

That is fine if it is just to estimate the land value. 

Originally posted by @Jack B. :
Originally posted by @Ashish Acharya:

@Jack B. , 

First of all, 

"Land value % = appraised land value when the rental was put into service divided by appraised total value when put into service." That is not right. You only use appraised value if the FMV of the property was less than the adjusted basis of the property. I do not think that is the case as the RE market is good.

If you ignore that mistake, with his calculation, he is determining the basis of the land (Depreciable basis = basis * land value percentage.).  The depreciable basis of the property will be total adjusted basis - his " depreciable basis". 

@Jack B. ,  Consistence with my reply to an earlier post, I think it is worth extending you return man. You dont owe any more tax with the extension. 

You're right. The FMV was higher than the tax assessors appraisal. So what I'm hearing is that this guy is wrong after all? Ashish I wish you would take me as a client, you're the only accountant I've ever talked to that actually knows what he is doing...

 Thanks for the kind word but we have many qualified and much more experienced accountants here.  As I have told you before, 

I mostly work with a business returns, but I highly recommend working with any of these guys. @Michael Plaks , @Basit Siddiqi , @Nicholas Aiola , @Logan Allec , @Lance Lvovsky and few more. 

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