Quote from @Michael Plaks:
@Justin Brin
You 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.
I found this:
Meiers v. Commissioner
T.C. Memo 1982-51Findings of Fact and Opinion of the Special Trial Judge
HALLETT, Special Trial Judge:
Respondent determined a deficiency of $3,653 in petitioners' 1977 Federal income tax.
The issues for decision are: (1) How should the total purchase price of two condominium properties acquired by petitioners during the taxable year be allocated between land and buildings for depreciation purposes;
Petitioners resided in Los Angeles, California, when they filed their petition in this case.
Depreciation Issue:
During 1977, petitioners purchased for investment purposes two condominium properties known as the Via Serena property and the Calle Sonora property. Petitioners paid $63,000 for the Via Serena property, and $48,000 for the Calle Sonora property. On their 1977 return and for depreciation purposes, petitioners allocated
80 percent of the total cost of both the Via Serena and Calle Sonora properties to the buildings involved, and
20 percent to land. Respondent determined that the allocation of cost 455*455 between buildings and land should be 55/45 for the Via Serena property, and 49/51 for the Calle Sonora property.
There is no dispute as to the law involved in this issue. The total purchase price should be allocated between the land and the buildings in the same ratio as the value of each component bears to the value of the property as a whole, as of the acquisition date in May 1977. Section 1.167(a)-5, Income Tax Regs.; Randolph Building Corp. v. Commissioner [Dec. 34,152], 67 T.C. 804, 807 (1977). The question is purely a factual one as to the appropriate and reasonable values of the land and buildings.
Respondent based his allocation solely upon the local property tax assessor's relative valuation of the land and buildings. We believe that there is insufficient evidence to establish that the assessor's relative valuations should carry much, if any, probative value in this case. The evidence shows that the assessor's values for the entire properties are grossly disproportionate to the actual purchase price of the properties.
There is no evidence in the record that the assessor's allocations of value between land and buildings comport with reality, any more than these total valuations. Accordingly, we decline to give the allocations of the assessor weight in reaching our conclusion.
Petitioners based their allocation upon the investigation of petitioner Steven Meiers regarding estimated building replacement costs as of 1977. We conclude that petitioner's valuation had a reasonable basis and was much closer to the mark than respondent's, and we hold for petitioners on this issue.I found this court case on this article:
https://www.kbkg.com/tax-insight/how-to-allocate-land-vs-bui...Court decision PDF: https://www.bradfordtaxinstitute.com/Endnotes/TC_Memo_1982-51.pdf
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From 1982 tax court case, Meiers v Commissioner (T.C. Memo 1982-51) I'm learning that if I can prove that the replacement cost is 80% of the purchase price then I can allocate 80% for improvements and 20% for land.
What do you think?
