What percentage is the structure worth vs land for depreciation?

Question

In California in the property tax bill you can see sometimes the land is 90% and the structure is 10% but the reality to rebuild the structure can sometimes cost more then the house purchase price. So what percentage ratio is best to use?

I guess even if the IRS audits you can show the structure is worth at least 90% of the purchase price.

For example if the house cost $800,000 according the the tax bill the structure is worth like 100k but definitely no one will build you a structure for 100k.

What do you think?

Michael Plaks · Answer

@Justin BrinYou are asking the wrong question. The correct question is - how much could you sell the land for if there was no house?You are not buying a house for $800k. You're buying land and the house, and some part of the $800k is for the house, and the other part is for the land. Need to find out what it is.The replacement value of the house is irrelevant. What matters is - how much of your $800k went towards the house in its current condition.

Account Closed · Answer

Agreed. I'm not arguing that I'm right. I'm just arguing that it rarely matters.(Actually, I use the "by guess & by golly" method, but don't tell anyone.) After all, how much is land worth? If it has gold below the surface is it worth more? If it has contaminants below the surface such as Flint MI is it worth less? It's a head scratcher to me. ;-)

Account Closed · Answer

Determining the allocation of the property's value between land and improvements (structure) for depreciation purposes is important for tax purposes. The IRS does not provide specific guidelines on the percentage split between land and structures because it can vary based on factors such as location, property type, and market conditions. However, there are some general principles you can consider: Appraisal: One common method to determine the allocation is to obtain a real estate appraisal. A professional appraiser can assess the value of the land and the improvements separately.Cost Segregation Study: For commercial properties, a cost segregation study may be conducted. This study involves identifying and reclassifying personal property assets to shorten the depreciation time for taxation purposes, which can increase depreciation deductions.Local Assessments: The property tax bill may provide a general indication of the value allocated to land and improvements, but it may not necessarily align with IRS guidelines for depreciation. It's important to note that for tax purposes, the IRS requires you to use the Modified Accelerated Cost Recovery System (MACRS) for depreciating residential and commercial rental property. MACRS has specific recovery periods for different types of property. While it might be tempting to allocate more to the structure for higher depreciation deductions, it's crucial to ensure that the allocation is reasonable and can be supported by appropriate documentation in case of an IRS audit. If the allocation appears to be significantly skewed, it could raise red flags during an audit. Consulting with a tax professional, such as a certified public accountant (CPA) or tax advisor, can help you make informed decisions based on your specific property and financial situation. They can guide you in determining a reasonable allocation that complies with tax regulations and helps maximize your legitimate tax deductions

Account Closed · Answer

Interesting perspective, "the U.S. Tax Court released Summary Opinion 2017-31 in May 2017, concluding that a county assessor’s allocation to land and improvement values was more reliable than the taxpayer’s proposed values. The Tax Court noted it could not find any authority that suggests a taxpayer is qualified to allocate the value of property between land and improvements."So, let me be more clear " I allocate 0.790283466 to structure and .209716534 to land, based on value of worm count per square yard for fishing for trout in the local river. And I haven't been bothered yet. (Actually, I use the "by guess & by golly" method, but don't tell anyone.) After all, how much is land worth? If it has gold below the surface is it worth more? If it has contaminants below the surface such as Flint MI is it worth less? It's a head scratcher to me. ;-)

Account Closed · Answer

I've always used 80% structure and 20% land. Never had a problem.

Justin Brin · Answer

I want to correct what I wrote. I will not recommend using the rule of thumb 20/80 since in case of an audit the IRS will not accept it.

Michael Plaks · Answer

@Justin BrinYou can choose one of the two paths. One is to keep walking in circles around your idea of how it should work. You already spent a lot of time building a case for your view. It is logical and well argued for, I'll give it to you. The other path is to accept the fact that the tax law can't care less what you think to be logical/fair/accurate and so on. You and I don't get to write the law. (In my specific case, it's actually a blessing, as you don't want the laws that I could have conceived.) We have to follow the law written by others. It can be stupid, unfair, ridiculous, whatever. It is the law.And the law makes one thing clear: You have to allocate the purchase price between the land and the building, and you have to base this allocation on some solid reasoning. Replacement value matters for insurance but does NOT matter for taxes.In this court case, the Court did not say that the county was accurate. They decided that the county's method was more convincing than the method used by the hapless taxpayer. I can guarantee you that your method would have been tossed by the Court just the same.You can choose a ratio more beneficial than that of the county, but it needs to be more persuasive than what was rejected by the court.Even if you do not have bare land sales, you can probably find comps of similar properties located on different size land, and this is one of several ways to figure out the land value. Your local Realtor should be able to help.

Justin Brin · Answer

28% for land is not too bad but 80% for land and 20% for structure sometimes doesn't seem realistic. Structure also has value even if the land is in the most desirable location in the world.

Michael Plaks · Answer

"Never had a problem" is not the same as correct. :)Quite a few people never had a problem shoplifting, for example. Or never flossing.

Alan F. · Answer

How do mineral rights and water rights work in all of this? 12 years ago the irrigation district capped our well & forced onto their water.