Cost segregation land value question

[Jonathan St.Leger]

Hey BP Nation,

@Yonah Weiss

When doing a coat segregation study, how do they establish land vs structure values in a high land cost area? On several podcasts I’ve heard that the land is anywhere between 15 - 20% of purchase price. How would that work on a more valuable piece of land such as oceanfront? Is it still similar and or how does the IRS view it?

Any insight is greatly appreciated!

[Yonah Weiss]

Thanks for the mention @Jonathan St.Leger! Most Cost seg firms are not land appraisers and rely on the client and/or their CPA to weigh in on land value. As you have heard on podcasts, the national average is around 15-20%, but many areas have much less, and other areas, like you mentioned (and California! 🤦‍♂️) can have higher land value, which will in turn lower the total depreciable basis of the building and all of it's components.

Ultimately the IRS will accept the following methods for land allocation.

• 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.
• 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.
• 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.
• 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.