Valuating Land at <1% of Purchase Price for Depreciation

[Sandy Chau]

Hi everyone,

There are couple of ways to value the price of land in depreciation, such as the 80/20 (20% to land) and Using Property Tax assessor's values, or getting an assessment of recently sold lots in the area.

I was discussing this with one of the CPAs, and he shared that if the cost of building the house is more than the purchase price, then the land is essentially of no value. 

For example: If I bought a house for $200K, and the quote to construct the very same house in the same location is $300K, then the value of improvements should be considerably high ($200K) and the value of the land be considered negligible (closer to 0).

Of course this helps depreciate more improvements in the life of the property, but I would like to hear your thoughts on whether this logic would hold up with IRS in the event of an audit.

What do you think?

[Michael Plaks]

The cost of constructing a replacement house is completely irrelevant. You paid $200k for an "as-is" house and land.

Claiming that the land value is $0 is a frivolous argument.