How do I determine the value of improvements to a rental duplex held in an LLC when the rental is sold? The total sale price was $157,500, but that included the original structure, the improvements, and the land. All have been depreciated. I have the original paid costs and the total amount of depreciation for each improvement, along with the original structures depreciation.
The easiest way is to break out the improvements by percentage of the original costs, then use that same percentage to allocate the sale price.
It won't matter much how you figure it, as long as it makes sense. All the depreciation will need to be recaptured. The total gain or loss with be the same no matter how you divide it up.
For example, you purchased the house and land for 80,000. Then you added a roof for 20,000.
Land is not depreciated, so you would have had to given that a value when you started the rental. Lets say it was 10,000.
Now allocate the sales price as 10% to land, 70% to building and 20% to the roof.
This can help with gain and loss, but again, ALL THE DEPRECIATION taken (or could have been taken) will be recaptured and taxed as income.
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The closing costs from the purchase are added to the basis of the rental property when it was purchased. These costs would be added to the purchase price.
The closing costs would include:
- Abstract fees
- Legal fees including title search and preparation of documents
- Recording fees
- Transfer taxes
- Owner's title insurance
- Any amount that the seller owes that you agree to pay, such as back taxes, mortgage fees and sales commissions