Quick question with hopefully a simple answer. If I purchase a property for 36k and put 4k into it and tax appraisal says it is worth 65k and comps say it is worth 62.5k then what number do I use on depreciating the property for tax reasons. Is it off of the purchase price of 36k or 40k with my fixups or is it what the property is valued at?
Thanks for your responses.
It’s the $36K, less the value of the land that it sits on.
Land does not depreciate in the IRS’s eyes and cannot be depreciated for tax purposes.
Comps and appraisals mean nothing.
Keith
So I just use the tax appraisals value of the land? Doesn’t seem right that I have to use those numbers since they are valuing my property at 30k over what I bought it at. The land is valued at 6,400… so I would only get to depreciate 29.6k over the course of 29.5 years so like 1k a year?
What happens when I fight my taxes on it next year and the land value and property value go down but I have already started my depreciation? Can I go back the following year with a different land value and depreciate accordingly?
Look at what the percentage is for your land and the structure out of the whole tax assessed value. If the land makes up 20% of the total assessed value, then apply that to your cost basis and just don’t depreciate 20% of your cost basis.
So say in your situation, your land is assessed at 13k and the structure is the remaining 52k for a total of 65k. Your land is 20% of the total assessed value.
Apply 20% to your cost basis of 40k. Therefore, you would depreciate the structure cost basis of 32k.
First of all, I already told you, the dollar amounts appraisals mean NOTHING! They just establish a value for the purposes of establishing a tax base within the tax authority area.
You, can, as Justin states, use the ratio of the land and the buildings from the tax bill.
You say that you paid $36K for it and now the appraisal is $30K over that…so, $66K and the land is valued at $6.4K, or about 10% of the value (9.7%), so using those ratios, based on the original purchase of $36K, the structure would be worth $3,492 and the structure worth $32,508.
The $32,508 could be depreciated over the 29.5 years ($1,101.97).
Some of the tax guys in here might give you some more specific guidance…
You CANNOT depreciate an amount over that which you paid…
DISCLAIMER: I am not a CPA and do not play one on TV.
Keith
Gotcha. That makes more sense. Thanks for the help.
Keith has the right idea, but is just a little off on the calculations.
Using your numbers, the property has a tax assessed value of $65K with $6400 allocated to the land value. Allocate 10% of the value of the property to the land and the remaining 90% to the dwelling structure (what the assessor calls improvements).
Now, applying the tax assessor ratios, 90% of your $36K purchase price, or $32400, is what you paid for the dwelling structure.
You say that you put another $4K into the property, so if all of that amount was put into the dwelling structure, you add that to your basis. Now your basis for depreciation is $36400. If the property will be held for rental use, you would use a 27.5 year depreciation schedule beginning with the month you put the property in service as a rental.
Only the amount you actually paid for the property plus the cost of your fixup can be depreciated. Makes no difference what the property appraises for next year, or any future year – only your potential profit changes with a new appraisal; your purchase price does not change
also consider what constitutes the 4k.
If you added an A/C unit, carpet or appliances, depreciate them seperately over fewer years. Even though a roof should be depreciated the same as the house, I track it seperately if possible so that if the roof is replaced I can take any remaining depreciation upon replacement.
make sure the $4k you put into the property is actual improvements, you can’t put holding cost, making keys for tenants, etc into depreciation, some people try to put everything in and only improvements to the structure should be depreciated