Tax assessed value or appraisal value to calculate depreciation?
Investor · Ashland, OR · Member since 2018 · 202 posts · 38 votes
Tax assessed value or appraisal value to calculate depreciation?
Most Popular Reply
Logan AllecBusiness Member
Accountant · Los Angeles, CA · Member since 2014 · 1k+ posts · 980 votes@Ellie Narie Congrats on the househack. I househacked a 4-unit myself in my 20s. I still have it today and it provides great income.
For your first question, let's back up here.
Your depreciable basis is based on what you actually paid for the property; it's the purchase property plus or minus some items on the closing statement as well as any costs you paid outside of escrow that you can include in your basis.
That number is completely independent of what the tax assessor says or what the appraiser says.
When people say to use the assessed value, they're referring to the allocation between land and building.
I think you get this but just want to make sure.
Now, you don't have to use the assessor's allocation if you can come up with some other reasonable allocation.
In my view, using the appraiser's allocation is reasonable. You could also do some more digging...was there a similar plot of land that sold around your property for $100,000 and you paid $400,000 for your property (land and building)? In that case it may be reasonable to allocate 25% land / 75% building.
That said, the IRS likes using the assessor's value and will often challenge other methods. Sometimes they win, and sometimes they lose. There was a Tax Court Summary Opinion a few years back (Nielsen) where the Tax Court sided with the IRS who wanted to use the county assessor's allocation, while the taxpayer depended on alternative methods I described above.
Also keep in mind that because you're living in one of the units, you can't depreciate the entire property for rental income / loss purposes -- only the amount attributable to the portions you're renting out.
As for the points, again, you must allocate between the points allocable to your residence portion of the property and the rental portion of the property. The former are generally amortize as an intangible asset, but you may be able to deduct them in full as prepaid interest in the year you pay them if you meet certain requirements and you itemize deductions. The points allocable to the rental portion should be capitalized as an intangible asset and amortized over the length of the loan.
Clarita CPA Group516 Reviews
6 Replies
- 5yAshish AcharyaBusiness MemberCPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
Originally posted by @Ellie Narie:
I just bought a house-hack 4plex in 2020. I don't have any other rentals. Filing taxes now, so just had a few questions.
1. When calculating depreciation, I heard you're supposed to use the assessed value based on the county records. Well, based on the county records, the land has a 44% value and the building has a 56% value. So, the land is at around 200k, and the building around 250k. That doesn't seem right to me. When I had the appraisal done, they valued the land at 75k and the building at 400k. What do I do here? Do I still have to use the tax assessor value?
2. What do I do with points? I read that you're supposed to amortize them over the life of the loan, so 30 years. When I'm entering all the info for my taxes, it says to enter depreciable assets. So, I entered the building of my property. But for the points - am I supposed to enter the points as a new depreciable asset?
Thanks.
- I wouldn’t use almost 50% as land.
- yes, you need to add an intangible asset.
INVESTOR FRIENDLY CPA®5241 Reviews - Investor · Ashland, OR · Member since 2018 · 202 posts · 38 votes5y
Originally posted by @Ashish Acharya:
Originally posted by @Ellie Narie:
I just bought a house-hack 4plex in 2020. I don't have any other rentals. Filing taxes now, so just had a few questions.
1. When calculating depreciation, I heard you're supposed to use the assessed value based on the county records. Well, based on the county records, the land has a 44% value and the building has a 56% value. So, the land is at around 200k, and the building around 250k. That doesn't seem right to me. When I had the appraisal done, they valued the land at 75k and the building at 400k. What do I do here? Do I still have to use the tax assessor value?
2. What do I do with points? I read that you're supposed to amortize them over the life of the loan, so 30 years. When I'm entering all the info for my taxes, it says to enter depreciable assets. So, I entered the building of my property. But for the points - am I supposed to enter the points as a new depreciable asset?
Thanks.
- I wouldn’t use almost 50% as land.
- yes, you need to add an intangible asset.Would you recommend using the appraised value? Or is there another option for calculating it?
- 5yLogan AllecBusiness MemberAccountant · Los Angeles, CA · Member since 2014 · 1k+ posts · 980 votes
@Ellie Narie Congrats on the househack. I househacked a 4-unit myself in my 20s. I still have it today and it provides great income.
For your first question, let's back up here.Your depreciable basis is based on what you actually paid for the property; it's the purchase property plus or minus some items on the closing statement as well as any costs you paid outside of escrow that you can include in your basis.
That number is completely independent of what the tax assessor says or what the appraiser says.
When people say to use the assessed value, they're referring to the allocation between land and building.
I think you get this but just want to make sure.
Now, you don't have to use the assessor's allocation if you can come up with some other reasonable allocation.
In my view, using the appraiser's allocation is reasonable. You could also do some more digging...was there a similar plot of land that sold around your property for $100,000 and you paid $400,000 for your property (land and building)? In that case it may be reasonable to allocate 25% land / 75% building.
That said, the IRS likes using the assessor's value and will often challenge other methods. Sometimes they win, and sometimes they lose. There was a Tax Court Summary Opinion a few years back (Nielsen) where the Tax Court sided with the IRS who wanted to use the county assessor's allocation, while the taxpayer depended on alternative methods I described above.
Also keep in mind that because you're living in one of the units, you can't depreciate the entire property for rental income / loss purposes -- only the amount attributable to the portions you're renting out.
As for the points, again, you must allocate between the points allocable to your residence portion of the property and the rental portion of the property. The former are generally amortize as an intangible asset, but you may be able to deduct them in full as prepaid interest in the year you pay them if you meet certain requirements and you itemize deductions. The points allocable to the rental portion should be capitalized as an intangible asset and amortized over the length of the loan.
Clarita CPA Group516 Reviews - Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes5y
Depreciation will be based on what you paid for it. Look at comparable land sales in the area to help determine land value which cannot be depreciated.
- Investor · Ashland, OR · Member since 2018 · 202 posts · 38 votes5y
Originally posted by @Logan Allec:
@Ellie Narie Congrats on the househack. I househacked a 4-unit myself in my 20s. I still have it today and it provides great income.
For your first question, let's back up here.Your depreciable basis is based on what you actually paid for the property; it's the purchase property plus or minus some items on the closing statement as well as any costs you paid outside of escrow that you can include in your basis.
That number is completely independent of what the tax assessor says or what the appraiser says.
When people say to use the assessed value, they're referring to the allocation between land and building.
I think you get this but just want to make sure.
Now, you don't have to use the assessor's allocation if you can come up with some other reasonable allocation.
In my view, using the appraiser's allocation is reasonable. You could also do some more digging...was there a similar plot of land that sold around your property for $100,000 and you paid $400,000 for your property (land and building)? In that case it may be reasonable to allocate 25% land / 75% building.
That said, the IRS likes using the assessor's value and will often challenge other methods. Sometimes they win, and sometimes they lose. There was a Tax Court Summary Opinion a few years back (Nielsen) where the Tax Court sided with the IRS who wanted to use the county assessor's allocation, while the taxpayer depended on alternative methods I described above.
Also keep in mind that because you're living in one of the units, you can't depreciate the entire property for rental income / loss purposes -- only the amount attributable to the portions you're renting out.
As for the points, again, you must allocate between the points allocable to your residence portion of the property and the rental portion of the property. The former are generally amortize as an intangible asset, but you may be able to deduct them in full as prepaid interest in the year you pay them if you meet certain requirements and you itemize deductions. The points allocable to the rental portion should be capitalized as an intangible asset and amortized over the length of the loan.
Interesting. So I guess it's all about proving the IRS about what method I use to calculate the cost basis. I might just go with the tax assessor's values, but I'm not sure yet.
As for the points - since this is a househack 4-plex (FHA loan), am I supposed to deduct 25% of them on schedule A in the year paid, and the other 75% over the life of the loan on schedule E? Or would I be required to deduct 100% of them in full on schedule A?
- 5yMichael PlaksPro MemberTax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
@Logan Allec gave you a terrific thorough answer. I second his advice.
If I had to defend your tax position before the IRS, I would be very comfortable defending the land value per your appraisal. Under the circumstances, taking the county value seems too conservative. But it is your choice.
Since you're DIY-ing your taxes, divide everything 25/75, including the points. If your taxes were done by an experienced accountant, there would be more subtlety.
Join the conversationCreate a free account to reply, vote on answers and follow this thread.