All Forum Posts by: Justin Brin

Quote from @Account Closed:

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:

1. 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.
2. 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.
3. 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

 What you do if the land appraiser says it's worth 600k and the improvements appraiser says the structure is worth 600k but the purchase price was 800k. Where you cut off 400k? from land or improvements? 

Quote from @Alan F.:

Quote from @Justin Brin:

What percentage is the structure worth vs land for depreciation?

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?

 Poignant question as I just paid property taxes (ouch) 28% for land in El Dorado county. 

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.

Quote from @Michael Plaks:

Quote from @Account Closed:

Quote from @Michael Plaks:

You 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.

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."

I did not find anything in the case you cited that supports your 80/20 allocation, Mike. :)

What I did find is a very explicit confirmation of my approach:

"The relevant inquiry is the respective fair market values of the depreciable and
nondepreciable property at the time of acquisition."

And since the taxpayer in this court case could not prove his allocation, the Court took the county's ratio.

It doesn't seem like SHARON M. NIELSEN AND STEVE L. NIELSEN has good legal advisers. I guess since this case was just about a few thousands of dollars it wasn't worth for them to hire a good lawyer for many more thousands of dollars :(

Quote from @Account Closed:

Quote from @Michael Plaks:

@Justin Brin

You 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.

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. ;-)

This is very interesting. Why the court decided to take LA county ratio? 

I want to prove with facts how LA county plays with improvements values just to get more percentage to land value in more desirable areas.
By proving this I want to show that LA county assessments can't be use for IRS depreciation purpose and can only be used for property tax calculations.
I believe that if SHARON M. NIELSEN AND STEVE L. NIELSEN had a good lawyer he could have proved to the court that LA county data can't be used for IRS depreciation.

Here is examples of properties from Los Angeles county:

Property A (Reseda, CA)

Assessor improvements estimate: $212,900 (0.24%)
Price per sq.ft.: 212,900/1,450 = $147

URL: https://portal.assessor.lacounty.gov/parceldetail/2120007020

Property B (QUARTZ HILL, CA):

Assessor improvements estimate: $424,300 (0.52%)
Price per sq.ft.: 424,300/1,450 = $235

URL:https://portal.assessor.lacounty.gov/parceldetail/3001012031

Property B has 60% more value per sq.ft. for improvements than property A.
If you look on the pics Property A, it seems like it was recently remodeled and has newer interior so it makes no sense that property B will be 60% per sq.ft. more in improvements.

Property A pics:

Property B pics:

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I don't see anyway to get a fair improvements value from LA county data. The ratios are not fair and are not by any meaning fair values for IRS deprecation calculations.

I believe in areas where there are not many land sales it's much more reliable to get a fair improvements value based on material and labor cost in the area then trying to get a fair land value.

There is no way that in a desirable areas structure value will be so low just because the land has high value. People need a house to live in, land enough is not enough. If the land cost 600k and the rebuild cost 600k and the median home sale price in the area is 800k no one is going to buy a new construction house there for 1.2M, This is not a fair value to say that the land will sell for 600k. It's not realistic. No one will do such a business.

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Disclaimer: I choose random properties that were sold in the last year or two to demonstrate the issue with LA county "fair" improvements (structure) values.
All data and pics in this post are data I collected publicly.

I'm not a legal adviser and this is my own opinion.

Quote from @Michael Plaks:

@Justin Brin

You 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.

Since in many areas it's very hard to find someone that is selling just the land without the house this means there is no comparables for just land.
I think it will be easier in those cases to find the fair value of the house at the time of the purchase. Since replacement costs are easier to get. Can they reflect the structure value?
If we have a fair structure value then we can calculate the land value?

I'm assuming in a very desirable areas "Land fair value" + "Structure fair value" will be much greater than the purchase price.
The county will choose to favor land value to be higher for property tax purpose (Since they will get more taxes on vacant lands).
Tax payers will prefer to favor the structure value since they can get higher depredations. None of them are wrong. Not the county and not the tax payer.

There are areas in Los Angeles that a house can cost $800k and the county will write the structure value is 20% ($200k) but there is no way that this is true. If a replacement cost is 600k there is no way a remodeled house in good condition will be 30% value of new construction.

I believe in this case the IRS can't come and claim allocating 80% of the purchase price to the structure is wrong.
What do you think?

Quote from @Account Closed:

Quote from @Justin Brin:

What percentage is the structure worth vs land for depreciation?

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?

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

From a small research I did it seems like many counties around the US use that ratio for single homes so I guess it might be ok even for areas were land is worth more.

@Mike Day I think is good to look for other deals in the meantime just to make sure you are not completely depended on this seller, also if the seller is taking too long you can reach out every day or two for a status and also tell him if you don't hear from him soon you will have to move on. This way you put some pressure on him to consider your offer more seriously. 

What percentage is the structure worth vs land for depreciation?

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?

Another question: What is the best way to check a metro economy strength and diversification?

I guess economy strength is also dependent on the sectors?! If a metro has 50% of the people work in the tourism industry most likely that area will get hit worse than area with only 10% who work in the tourism industry in case of a recession? 

I'm trying to compare areas by how diversify their economy so I'm looking at the BLS data report for Columbus OH and I see the numbers are a bit off:
The Civilian labor force is 1,120.7 while the Total Nonfarm jobs are 1,157.1 (36k difference).
As much as I understand Civilian labor force is the total potential force and Total Nonfarm is a percentage of the Civilian labor force.
Am I wrong?
Is the data discrepancy due to these two fields come form two different data sources and since this is statistical data then there can be a difference in the data?

(Data source link: https://www.bls.gov/regions/midwest/oh_columbus_msa.htm#eag_...)