San Mateo, CA · Member since 2016 · 11 posts · 2 votes
Hi BPers, I need help to determine the improvement portion for depreciation on my new construction home. It was placed for rent on 6/19, and occupied 8/19. The Property Record Card is not accurate. It only shows the land value as $50k and no Market Value. I bought the house for $289K. Including closing cost and fee, the total cost is $300k.
1) I'm doing my own taxes, so do I list the land value as $50K? Should the depreciation from improvements be $239K ($289K-50K) or $250K ($300K to include closing costs - 50K)?
2) What happens to the depreciation when next year the County increases the land value with the actual sales price of $289K?
3) One accountant told me if the County records are not accurate for new construction, he would use 80/20 or 50/50 depending on how expensive the house costed. Has anyone else heard of these rule of thumb? How does one determine what is expensive enough to use the 50/50 rule?
Las Vegas NV and Milwaukee, WI · Member since 2020 · 7 posts · 2 votes
6y
1) Determining the value of land is more of an art than a science when it comes to accounting. The IRS suggests computing the ratio of the value of land to the building from the property tax assessor's values. Then multiply the ratio by the purchase price (including closing costs) to get the value of the land. This is their example:
Ryan bought an office building for $100,000. The property tax statement shows: Improvements $60,000 75% Land $20,000 25% Total Value $80,000 100% Multiply the purchase price ($100,000) by 25% to get a land value of $25,000.
2) you carry the value of the building on your accounting books at cost, meaning at $300k minus the value of the land. You take this and divide it by 27.5 years (for a residential property). This is then your annual depreciation expense. The value the assessor puts on your land in the future is irrelevant as far as depreciation is concerned. An example:
You paid $300k for the house, the land is worth $50k.
We take 300-50= $250k
$250k/27.5= $9,090.91
That is our annual depreciation expense. You would divide that by 12 to get your monthly depreciation expense.
3) The 80/20 rule is a common rule of thumb if there is no way to find the value of the land. Using this rule your land would be valued at $60k ($300k*0.2= 60). I would stick with the assessor's value of the land at $50k because it allows you to depreciate that extra $10k.
I hope this helps, let me know if I can help by going more in depth on any of these.