Assessor's land value too high?

Question

The county assessor's apportionment of land v. improvements seems a bit high to me.  On the 4 houses I purchased this summer, the land values are 42%, 42%, 33%, and 22% of the total assessed value.  For depreciation purposes, I'd obviously prefer to shift value from land to the improvements. The total assessed value for each of these houses ranges from 24K to 40K, so I'm not going to go broke playing it safe, but hate to give up thousands in depreciation if there is a defensible way around it.  Any recommendations?

N/A N/A · Answer

"Run the numbers. On a $24K property, the difference between a 58% allocation to depreciable improvements and a 75% allocation is $4000. Over the class life of the property, the difference in your allowable depreciation is about $145 (rounded) per year.

In the 25% tax bracket, a 75% allocation only reduces your annual tax liability by $36 for the property in this example. At this rate, it will take you 27.5 years to save a total of $1000 on your taxes."

You're correct...this issue is not the difference between getting rich and going broke.  However, this $1000 you mention is for one property.  I own 2 more with this same problem and they are higher value properties, so there's another $3000 or $4000 in depreciation I would prefer to claim.  Further, I intend to buy additional properties which (following the trend) may well be a little fat in the land valuation.  I simply want to take full advantage of one of the best tax advantages of owning rental property.

"At best, you just break even in this scenario if you plan to eventually sell the property. In the end, your wallet won't be any fatter or thinner regardless of whether you took the 75% allocation to improvements or the 58% allocation."

Correct, but I do not currently have plans to sell it.  And with that philosophy, why depreciate property at all if you're only going to pay it back someday?  It just makes sense to defer every 2013 tax dollar you can even if you have to repay it 27.5 years from now (unless you anticipate a significant reduction in tax rates between now and then).

Steven Hamilton II · Answer

How much is vacant land going for in your area?

Dave Toelkes · Answer

@N/A N/A

"...thousands in depreciation" ???

Run the numbers.  On a $24K property, the difference between a 58% allocation to depreciable improvements and a 75% allocation is $4000.  Over the class life of the property, the difference in your allowable depreciation is about $145 (rounded) per year.

In the 25% tax bracket, a 75% allocation only reduces your annual tax liability by $36 for the property in this example.  At this rate, it will take you 27.5 years to save a total of $1000 on your taxes.  But, when you go to sell the property, the depreciation will be taxed at 25%; so, whatever you saved on your taxes over the years will just be given back anyway (and in one lump sum).

At best, you just break even in this scenario if you plan to eventually sell the property.  In the end, your wallet won't be any fatter or thinner regardless of whether you took the 75% allocation to improvements or the 58% allocation.

Just how I see it.

You have to run the numbers for your investment strategy and for your tax bracket to see which option works best for you.  For example, if you are in the 15% tax bracket, the 58% allocation to improvements gives you a slightly higher NET after taxes after sale.

Daniel Dietz · Answer

I hold my properties in a ROTH SDIRA, so it is not an issue to me, but a friend that also has long term properties has used the advice of his CPA for quite a few years which is this: he had been buying REO and Estate Sale properties for about 50-60% of assessed value. Example house assessed value of 100K of which 80K is property and 20K land. He buys it for say 50K. He uses the same *percentage* of what the tax assessment is. NOTE - In my state, our assessment rate is very close to the actual values in almost all cases.

Dan Dietz

N/A N/A · Answer

Thanks, Bill.  In all honesty, I think I will just use the 25/75 rule.  There is no mention of land value v. improvement value on the purchase contracts as these were simple single family home purchases.  Also, this is an old neighborhood and there's little chance there are vacant lots and less chance any of them sold in recent history.

I'm surprised no one else has had this issue...does everyone else just use the PVA's determination?  Does anyone else just use the 25/75 rule and not consult the assessment?

Bill Gulley · Answer

Find market comps for land, you don't need to use assessed values. When you buy rentals or commercial property subject to depreciation the land and improvements values should be broken out in you purchase contract to set the values paid. :)

N/A N/A · Answer

I would like to maximize my depreciation deduction on my taxes. But if I use the PVA's values for land/improvements, I won't have nearly as big of a depreciation deduction as if I used, say the 25/75 rule of thumb.  Has anyone else had this situation?  Did you use the PVA's assessment or use your own apportionment?

William T. · Answer

Not sure what your question is?

For depreciation purposes, I'd obviously prefer to shift value from land to the improvements.  but hate to give up thousands in depreciation if there is a defensible way around it. Any recommendations?

So is your question, how do you keep your depreciation cost?