@SuzyQ727 wrote:
I still don't fully understand the rationale behind the process of allocation as it relates to the sale of a real property.
Well, if you went out and bought a property, for example a house on a lot, for rental purposes and paid a total of $500,000 for it, you would need to allocate part of the $500k to the house and part to the land. The reason for that is land is not depreciable but the house is, so you have to arrive at some sort of split.
If, further, you determine that of the $500k total you paid, $400k is for the house and $100k is for the land, then your depreciable basis is $400k (but your total basis is still $500k).
If you later sell the property for $600,000, you would allocate part of that sales price to the house and part to the land. Since you allocated 20% to the land when you bought the property, you could allocate (if nothing has changed), 20% of the $600k ($120k) to the land and the rest to the house.
Nothing much changes in the above scenario because you still have to recover depreciation deductions and pay capital gains tax on the balance (on the house and land).
