Land Value for Depreciation

[Patrick Shep]

if you’re figuring out the land value for depreciation purposes, can I use the Fair market value for the land? The county assessment taxes it at 59k which is WAY too high. A plot of land has sold for $8500, $10k and 29k within that area.  Can these be averaged together or even use the 29k? I don’t want any flags but don’t want to leave anything on the table For depreciation.

[Greg Scott]

I just took a class where a CPA talked about this.  

If you have solid documentation for your position, you are probably OK. If you have no documentation, you will lose if you get audited.

[Jason Malabute]

Just a heads-up, land itself isn’t depreciable, but the building on it is. To figure out the land value , the county assessor’s website should have a breakdown of the assessed value for both the land and the building. I would talk to the county about how they calculated the assessed value.

[Patrick Shep]

Quote from @Jason Malabute:

Just a heads-up, land itself isn’t depreciable, but the building on it is. To figure out the land value , the county assessor’s website should have a breakdown of the assessed value for both the land and the building. I would talk to the county about how they calculated the assessed value.

 I know just working for the value of land to subtract.

[Patrick Shep]

Quote from @Greg Scott:

I just took a class where a CPA talked about this.  

If you have solid documentation for your position, you are probably OK. If you have no documentation, you will lose if you get audited.

I'll see what my CPA recommends. I certainly don't want to get audited. The reality is the land isn't worth much based off of fair market value. Double edged sword

[Andrew Strauss]

Hi Patrick - I would suggest to get the professional appraisal done. This will strengthen your documentation and will have basis if you are ever challenged by IRS.

[Michael Plaks]

Quote from @Patrick Shep:

if you’re figuring out the land value for depreciation purposes, can I use the Fair market value for the land? 

You will not get audited due to land values you report on your tax return. If you're audited for some other reason, the issue of allocation to land might potentially come up during an audit, but it is still rather unlikely. 

That said, the IRS allows "any reasonable method" of allocation which of course includes FMV. Average or, better yet, calculate FMV per acre.

Keep the comparable data just in case. Ordering an appraisal for such a small property would be silly.

[Account Closed]

Hey Patrick, 

Please keep in mind that land itself isn't depreciable. To determine the land value for depreciation purposes, you can use fair market value instead of the county's assessment if it's unreasonably high. In your case, with land selling for $8,500, $10,000, and $29,000 in the area, it’s reasonable to use these comparables to allocate the land value. You can average the amounts or use the higher $29,000 figure if it reflects market conditions, as long as you document your methodology and provide evidence, such as sales data or an appraisal. This approach maximizes the building value for depreciation while remaining defensible to the IRS, minimizing the risk of flags.

* This is not tax advice

[Mike H.]

If you're actually correct and the village has a 59k assessement on the land but the reality is the land is worth 20k, then I'd consider getting an appraiser even.  If you pay them diret and hint to them the comps you suggest because you're trying to come in lower, then they are more likely to do that.

To me, I would just use a couple of low end sold comps and call it a day.  At the end of the day what are really talking about anyway? If this was a million dollar piece of land, thats an issue.  But if you have two comps at 10k and 20k and put down 15k, they're not going to say anything.

[Sean Graham]

Quote from @Patrick Shep:

if you’re figuring out the land value for depreciation purposes, can I use the Fair market value for the land? The county assessment taxes it at 59k which is WAY too high. A plot of land has sold for $8500, $10k and 29k within that area.  Can these be averaged together or even use the 29k? I don’t want any flags but don’t want to leave anything on the table For depreciation.

Yes you can use reasonable comps.

In regards to the tax assessment, it might make more sense if you prorate the land value over the total value and apply it to your purchase price 

[Ashish Acharya]

@Patrick Shep Yes, you can use the fair market value (FMV) for land rather than the county assessment for depreciation if FMV is lower.

Use comparable sales like the $8,500, $10,000, and $29,000 plots and average them for a reasonable value. Document these sales to support your valuation, or get a professional appraisal for extra assurance. This approach will help you maximize depreciation without raising flags.

This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

[Sean O'Keefe]

@Patrick Shep As @Michael Plaks pointed out the IRS allows "any reasonable method" of allocation. Here are some examples of those methods below: 

1. Rely on the county tax assessor’s allocation: A taxpayer can review their county tax assessor’s property allocation, which usually provides an assessment of land and improvements based on the county’s guidelines. This allocation can be found on the most recent property tax bill or on the county assessor’s website. The values listed may not match the total acquisition cost, but the proportionate ratio between the land and improvement values can be applied to the final purchase price for income tax purposes.
2. Commission a full-scope land appraisal: Another option is to commission a full-scope land appraisal. A qualified professional appraiser will generate a comprehensive analysis considering factors such as sales comparisons, highest and best use, market conditions, and income generated following Uniform Standards of Professional Appraisal Practice guidelines. While this option is the most accurate land valuation approach and least likely to be challenged by the IRS, it is also the most costly and can require several weeks to complete the process.
3. Limited-scope land appraisal: A limited-scope land appraisal can be completed by a real estate professional who provides an analysis of sales comparisons or other limited metrics. Similar to a broker's opinion of value, this analysis is less detailed and may not follow USPAP guidelines.
4. Replacement cost method: This methodology is supported by a 1982 tax court case, Meiers v Commissioner (T.C. Memo 1982-51), where the taxpayer successfully argued against the property tax “assessed value” allocation. In this approach, the taxpayer calculated that the cost to construct a new building (say, $300 per square foot at 2,000 square feet, totaling $600,000) should be allocated to building and the remaining balance of the acquisition should be allocated to land.
5. Rule of thumb method: Some taxpayers use a predetermined percentage (such as 80/20 percent, 70/30 percent, etc.) for improvements and land. Most tax professionals do not advise their clients to utilize this approach and it may raise concerns under IRS examination. This was highlighted when 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.

Use the one that feels most reasonable for you. 

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*This post does not create a CPA-client relationship. The information contained in this post is not to be relied upon. Readers are advised to seek professional advice.

[Bryan Martin]

Quote from @Patrick Shep:

if you’re figuring out the land value for depreciation purposes, can I use the Fair market value for the land? The county assessment taxes it at 59k which is WAY too high. A plot of land has sold for $8500, $10k and 29k within that area.  Can these be averaged together or even use the 29k? I don’t want any flags but don’t want to leave anything on the table For depreciation.

Yes, you can use the fair market value (FMV) for the land when determining depreciation. If the county's assessed value ($59,000) seems too high, it's acceptable to base the land value on recent comparable sales in your area, like the ones for $8,500, $10,000, and $29,000. You can average these or choose the most comparable sale to determine a reasonable land value.

Using a lower land value increases the building’s depreciable basis, maximizing your depreciation deductions. Just make sure to document how you arrived at the land value in case of IRS inquiries.

If you’re unsure or want to avoid any red flags, consider consulting a tax professional to ensure you’re compliant and optimizing your depreciation.