@Bob Flynn
@Bob FlynnWell, you did pay something for the land. I doubt the IRS would agree with you that you "got the land for less than nothing." If you purchased a property, building and land, at a discount, they would likely view you as purchasing at the same discount for both the land and the building.
Have you asked your CPA why they made the 25% / 75% allocation like they did? Most firms will just rely on the assessor's ratio between land and improvements because it's quick and easy.
But of course that's not the only way.
Are there any recent sales of comparable undeveloped land in the area? This is a pretty good fact to support the value of the land.
Here are some excerpts from a couple Tax Court cases on this topic. I am not saying these cases are in any way are applicable to your situation, but I am rather just providing them as information so you can see how Tax Court judges think through this (emphasis mine).
Offshore Operations Trust (various factors considered)
We must first determine a proper valuation for the three story mill-type building previously located at 33 University Road, Cambridge, Massachusetts. The building lot was some 51,000 square feet in area. The property was purchased by Dr. Baird for $300,000 in January 1964 pursuant to the terms of an option granted him in May of 1955. At the time of the purchase $50,000 was allocated as the share of the purchase price attributable to the land and $250,000 was allocated to the building.
Dr. Baird testified that his allocation was and is consistent with the regulations, specifically section 1.167(a)-5. He based his allocation on two premises: First, that his determination was consistent with the relative values placed on the land and building by the tax assessor of the City of Cambridge and, secondly, that $250,000 was consistent with his estimate of the value of the income the building was capable of generating.
Respondent argues that a proper allocation of the purchase price would be to value the land at $234,000 and the building at $66,000.
Thus we are once again faced with the problem of valuing a piece of property remote in point of time from its date of acquisition. There is no serious allegation that the original purchase was not a good faith, arm's-length transaction. Both parties agree that Offshore's basis in the property is $300,000 by virtue of the nature of the transaction in which Offshore acquired the property from Dr. Baird.
Valuation and allocation disputes such as this necessarily depend upon their own particular facts and circumstances. The petitioner must overcome the presumption of correctness that attaches to the respondent's determination.
We think Offshore has established the proper value and allocation as between the land and the building. Those factors influencing our decision to some extent synergistically include Dr. Baird's familiarity with the area in which he bought the property. He went through this section of Cambridge daily for 25 to 30 years. He was intently interested in the well-being and growth of Baird Associates and then Baird-Atomic. He knew of the space needs of the business and was interested in seeing that they were met.
By no means determinative, but nonetheless informative, was the value ascribed the land and the building by the tax assessor of the City of Cambridge. In 2554-58 Creston Corp., the laws of the Commonwealth of Massachusetts prohibit variance in the tax rate between land and improvements. Thus, no advantage appears which would cause the City of Cambridge to allocate a proportionately higher or lower value to depreciable versus nondepreciable property.
The utilization of assessed value as at least a guide in valuation is not totally unique in the tax law. Insurance settlements are considered but not treated as conclusive when attempting to determine the amount of an actual loss.
Mr. Kinsella's appraisal of the property, which was done originally for the seller's estate, is also helpful. He actually viewed the property while it was still in use by petitioners. This does not negate the probative value of an assessment done later in point of time with respect to a certain date in the past.
No useful purpose would be served herein by going over each method of appraisal or item of evidence. Suffice it to say that we have found as an ultimate fact and so hold that a value of $50,000 for the land and $250,000 for the building was reasonable when made.
Steven A. Meiers (assessor valuation disregarded in favor of estimated building replacement costs)
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 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. The question is purely a factual one as to the appropriate and reasonable values of the land and buildings.
Respondent [IRS] 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 building 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.
