Investor · San Diego, CA · Member since 2012 · 309 posts · 18 votes
Hey guys!
Do you use the county assessor's statement or the property insurance's replacement cost as your COST BASIS for the building/structure of your property?
According to property assessor, the cost basis of the structure of our 1 unit is 60000$, BUT according to our insurance company, it will take 112000$ to re-build.
Last year we depreciated using 60000$ cost basis, but I am reading the book that suggests different methods, making a point that there's no right one.
It's a huge difference, and according to the book ("Every landlord's tax guide" by Nolo"), usually county assessors UNDERESTIMATE, which gives me SMALLER deduction if I use their data!!!
1.What do you use as a cost basis for depreciation?
2.Is it legal for me to claim insurance company's cost basis if last year I claimed county tax assessor's? Can I make a switch?
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
13y
If you buy a property, basis is simple. Assessor's value, insurance value, and fair market value are all irrelevant.
It starts with the price you pay.
You add costs incurred as part of the purchase.
You then add capital improvements.
You subtract depreciation taken or allowed (whichever is more.)
I think Edita D. is really getting at the value of the improvements to be used for depreciation. That would some a portion of the price you paid. Part of that price is land and part is improvements. You only depreciate the improvements. Not sure the term "basis" comes into play. Certainly not in the same sense as basis is used when you figure your gain on a sale.
Edita, if you were doing depreciation based on the assessors value rather than your purchase price, you will need to refile corrected tax returns for those years. As Steven says, you may want to use the ratio from the county assessment to split your purchase price into land and improvements. But you cannot use their actual values.
In addition to that amount, if you make capital improvements, you can, in many cases, depreciate those faster. Steven Hamilton II posted recently about these schedules. Carpets, for example, can be depreciated over five years. And, if you take something out of service before its fully depreciated, you can take the remaining depreciation at that time (as I understand it, my CPA does all the gory details.) So, those new carpets that are being depreciated over five years get a big lump of depreciation at three years when they're totally trashed.
So, those new carpets increase your basis in the year you put them in. Then, each of the next five or six years (five years of time is usually spread across six tax years) you take a portion of the costs for depreciation and reduce your basis by that same amount.
Now, under some circumstances, fair market value does come into play. If you inherit a property, for example, your basis for that property is the fair market value on the date of the death.
Investor · Brooklyn, NY · Member since 2013 · 254 posts · 28 votes
13y
My understanding is that you use the purchase price for the property according to the contract. You will need an appraisal report to segregate the land portion of the purchase price that cannot be depreciated.
Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
13y
Depreciation is based on YOUR BASIS (costs)in the property. Replacement costs is irrelevant. You need a CPA type person to determine what is the acceptable % of your purchase attributable to the improvements (excluding the land) as Mary Joe indicated. I assume this was a straight out purchase of the property. An inheritance, buying some entity than owned the property as opposed to the property itself, etc. changes everything.
Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
13y
Edita, you use your basis and you can use the ratio of land to building suggested by the assessor. That is typically the best route. In some places unimproved la d would be worth less so some start with that as their land portion and subtract it from your total purchase price plus rehab
Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
13y
@Steve Babiak,
I've never heard of FMV being relevant, unlees the improvements were part of a business whose price included good will, blue sky, etc. I'v always thought your basis was purely purchase price/acquisition costs.
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
13y
If you buy a property, basis is simple. Assessor's value, insurance value, and fair market value are all irrelevant.
It starts with the price you pay.
You add costs incurred as part of the purchase.
You then add capital improvements.
You subtract depreciation taken or allowed (whichever is more.)
I think Edita D. is really getting at the value of the improvements to be used for depreciation. That would some a portion of the price you paid. Part of that price is land and part is improvements. You only depreciate the improvements. Not sure the term "basis" comes into play. Certainly not in the same sense as basis is used when you figure your gain on a sale.
Edita, if you were doing depreciation based on the assessors value rather than your purchase price, you will need to refile corrected tax returns for those years. As Steven says, you may want to use the ratio from the county assessment to split your purchase price into land and improvements. But you cannot use their actual values.
In addition to that amount, if you make capital improvements, you can, in many cases, depreciate those faster. Steven Hamilton II posted recently about these schedules. Carpets, for example, can be depreciated over five years. And, if you take something out of service before its fully depreciated, you can take the remaining depreciation at that time (as I understand it, my CPA does all the gory details.) So, those new carpets that are being depreciated over five years get a big lump of depreciation at three years when they're totally trashed.
So, those new carpets increase your basis in the year you put them in. Then, each of the next five or six years (five years of time is usually spread across six tax years) you take a portion of the costs for depreciation and reduce your basis by that same amount.
Now, under some circumstances, fair market value does come into play. If you inherit a property, for example, your basis for that property is the fair market value on the date of the death.
Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
13y
Steve Babiak, Wayne Brooks,
You must use the lower of basis or the FMV when you CONVERT a property to a rental.
As far as determining the cost between land and the building. You can figure out what the assessor's ratio is and you can use that ratio.
Edita D.
For example if your purchase price was 100k. The assessor's website probably says that the land is worth 40k and the building is worth 120k for a total of 160k.
You know that 40k represents the land and 120k represents the building.
40k/160k = 25% of your cost is related to land
120k/160k = 75% of your cost is related to land
That is how you can apply the assessor's ratio to determine how much you should depreciate.
A different method is to get comps of improved/unimproved lots to determine what the land price is apart from the building.
1--Does the depreciation for a given year factor in the date when you made the purchase? Like, if you bought a rental property in early December 2013, and you are doing taxes a month later in Jan 2014, do you still get to count the full amount for 2013 as if you had owned it all year?
2--Let's say you buy a rental and you own it for five or six years and you take depreciation each year. Then in the seventh year you re-roof the place. Would that roof cost factor into the depreciation now? If so, is it retroactive?
Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
12y
@CL
@CL Ziegler - you can only depreciate for the period of time that you actually own the property. Also, you can only start depreciation from the time that you have put the property into service as a rental.
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
12y
1. You would only take depreciation for the portion of the year you owned it. I'm not sure it the calculation is to the day or rounded to the month, though. But its certainly not a full year. Your accountant will do the calculation from the HUD-1 you provide. I assume turbo tax or other programs would, too.
2. The new roof is a capital item. When you put it into service you pay out the cash for that new room, but you cannot deduct that all at once. Instead, you start depreciating that new roof based on its lifetime. I believe that's 27.5 years for a roof. If, after, say 15 years, you replace the roof again, you would take any remaining depreciation on the first roof and start depreciating the second one. If had done a cost segregation on the property and broken out all the pieces you may have been able to take a chunk of depreciation all at once when you replaced the roof the first time. Not 100% sure about that, I've not tried to do cost segregation.
This applies to any capital item. More commonly you'll deal with it for stuff like flooring and appliances.
Rental Property Investor · Douglas County, MO · Member since 2014 · 1k+ posts · 1k+ votes
12y
Our assessor does not separate land value from building value, and there are no undeveloped lots for sale currently in our area. What is the best way for us to determine a land value when we purchase a new property?
1--Does the depreciation for a given year factor in the date when you made the purchase? Like, if you bought a rental property in early December 2013, and you are doing taxes a month later in Jan 2014, do you still get to count the full amount for 2013 as if you had owned it all year?
2--Let's say you buy a rental and you own it for five or six years and you take depreciation each year. Then in the seventh year you re-roof the place. Would that roof cost factor into the depreciation now? If so, is it retroactive?
Depreciation as @Dave T said will be prorated for the number of days in the year.
Unless you initially segregated out the costs upon purchase between the individual components of the home you will continue to depreciate it over 27.5 years. Otherwise yes, if you put a new roof on now and then 7 years later have to do it again after 7 years, the remaining cost will be deducted in that current year.
Our assessor does not separate land value from building value, and there are no undeveloped lots for sale currently in our area. What is the best way for us to determine a land value when we purchase a new property?
Reasonable would be to take a % of the total price. Often 10-20% and go from there. Ultimately it would be subject to recapture at some point anyway....