All Forum Posts by: Clay W.

I self-prepare my annual tax returns and have a tax scenario/question regarding the allocation of Property Taxes and Carry Expenses for land.

In 2022, I purchased a vacant parcel of land that is zoned for multi-family development. The site is located in a suburban area and previously had a building on it that was scraped years ago. In short, there is infrastructure (sidewalks, etc) so this is partially improved land. My plan is to eventually develop "for-rent" apartments as an investment. I do not own the lot within a LLC or other corporate structure.

Given that this acquisition is for investment purposes (not for personal use, future second home, etc), I am trying to confirm exactly how I should allocate my incurred expenses (i.e. mortgage loan interest, land surveyor services, ongoing property taxes, architect consulting fees, security fencing, etc) on my tax returns. I have other existing residential rental properties that I account my expenses for on my Schedule E, but those are going-concern properties.

My initial thought was that I should capitalize all my expenses related to the lot (thus increasing my overall land basis) until the time that the property is delivered and begins service as a rental. However, I've also read conflicting information that the mortgage interest and property taxes should not be capitalized and that I should allocate those within my personal itemized deductions, however, I will receive no benefit for these expenses since I am capped at $10,000 SALT.

Many thanks for your feedback.

@Nicholas Aiola

So to clarify:

  --  The tax assessment I received after closing was based on my exact purchase price ($369k), with the County assuming my dwelling is worth $225,459 (Dwelling/Fixtures) -- 61% ratio.

     ...However, the appraisal that I mentioned was, of course, pulling current tax assessments that show showing surrounding land values of roughly $52k - $93k since those properties haven't traded for years. The previous owner's assessed land value itself was roughly $63k - (39% of the $160k total assessed value).

  --  Therefore, if the appraiser's opinion of site land value was $61k, and the actual dwelling at $354k ($312k Home + $42k Garage), would I add the $354k and $61k and then take 61% of that?

±$415k x 61% = ±$253k?

 -- If so, I would then add the ±$4k closing costs to account for a total value for depreciation of $257k?

@Nicholas Aiola 

--Good evening - quick question regarding a post I made on setting the Dwelling basis for depreciation:

   --Purchased first duplex - Early April 2018 - $369,000 - California

- New Tax Assessment received assumes $143,541 (Land) and $225,459 (Fixtures)  = Roughly 39% Land/61% Dwelling 

Given the higher value of land in California, am I to just use the $225k figure (+loan costs at closing) as my basis? I don't know how else to support another/higher value for depreciation purposes.

***Otherwise, while my appraisal gave the sales comp approach the most weight in determining value, the Cost Approach was second and had the following breakdown:

"...Site value was determined by a review of assessors tax records for land value and was determined to be the most effective as there were no recent lot sales. Similar lots had values ranging from $52k to $93k. Opinion of site value: $61k - Dwelling $312k + Garage $42k (Total Est. Cost New = $354k)."

Thank you~

I am not working with a CPA given the very straightforward scenario I face.

Anyone else have a rental in California and feel the tax assessment of 39% Land/61% Dwelling is common and my best/only option to support my depreciation calculation?

Would appreciate clarification on best determining my dwelling versus land value for depreciation:

-    Purchased first duplex - Early April 2018 - $369,000 - California

-    New Tax Assessment received assumes $143,541 (Land) and $225,459 (Fixtures)

-    However, while my appraisal gave the sales comp approach the most weight in determining value, the Cost Approach was second and had the following breakdown:

      "...Site value was determined by a review of assessors tax records for land value and was determined to be the most effective as there were no recent lot sales. Similar lots had values ranging from $52k to $93k. Opinion of site value: $61k - Dwelling $312k + Garage $42k (Total Est. Cost New = $354k)."

**I understand that land values in California are higher, but should I really attribute roughly 39% of my cost to land? I also spent approx. $4k for new fencing, which I know should be included in my overall basis as a capital improvement, but I have read that it has a shorter depreciation schedule, so how do I show this on my taxes for 2018?

Thank you~

I just acquired my first investment property – a duplex. One of the tenants in occupancy for decades is a hoarder. I will be submitting to them a "60 days notice to vacate." I don’t know ultimately what will be discovered once everything is removed from the unit because the inspector could not complete a full walk-through during escrow. However, there will clearly be cleaning costs and rehab work for visible damage noted during inspections.

Because there is technically a "tenant" in place now, but the unit is in no way habitable/rent-able until fixed up, how will those investment dollars be reflected  -  i.e. applied to the basis or deducted at once?

Thanks to you and others for your responses. Very concise and exactly what I wanted to reaffirm! I plan to serve the notice this week, focus on unit rehab in 2 months time (if the tenant can get out by then!), and get going on re-tenanting at market rate.

Now I just need to get the proper forms without breaking the bank!

 Thanks for the reply.

Just to clarify, my understanding is that I can simply serve them notice to vacate in 60 days (since they've been there for more than one year - and are now effectively month to month) without reason. Whether I plan to renovate the place, move in myself, or any other reason shouldn't be of their concern or cause to sue me for some reason. That should then not be classified as an "eviction", correct? 

I assume that an eviction would speed up the process since I could lay claim to various legal issues. Full disclosure, that particular tenant is a hoarder and the unit is in disarray. 

Hello - I have finally acquired my first rental property (a duplex) and I plan to get my feet wet and manage myself to not only learn but save money since property management doesn't pencil at this point.

One renter seems OK for now and has been in occupancy a few years. The other tenant has been there years and will be evicted for numerous reasons that the previous owner did not care to address.

I plan to fix up the property over the next few months and renew the existing tenant to a higher, 1-year lease and then search for a new tenant at market rate.

Feeling a bit overwhelmed, I'd like some advice on where to start with a new thorough lease and forms to use since I want to secure a new lease with the existing tenant and will need to screen for a new tenant once I evict and renovate the other unit.

I am considering to join the California Apart. Assoc. but even that is quite expensive for a one-duplex owner and not sure if it is worth it just yet. Other than the numerous "Real estate investing books" I have, any other advice/direction would be much appreciated. Thanks!

I am evaluating the purchase of a former gas station pad that has long since been demolished and paved over. There has also been awarded a No Further Action letter related to years of monitoring after cleanup. However, there is an operating gas station across the street that has an underground "plume" that affects the dirt underneath the subject pad. The company that operates the gas station is supposedly paying for the ongoing vapor/soil testing, etc. I know some investors that run from anything having to do with current or former environmental issues while I know others that find a way to deal with it. I'd like to know how much weight an NFA carries with the subject pad and what I have to worry about in the future if a case then resumes related to my soil even though it would likely be determined that the neighboring gas station was responsible. Are there reasonably priced environmental insurance policies that I could pay for that would over future liability given that the land now has NFA status? --Thanks