@nessanewf wrote:
Thank you for your extensive answer to my question Champ. So, if I'm understanding you correctly to determine the basis for depreciation, I use either the purchase price of the property plus any improvements made or the FMV "as of the date the property is placed in service, minus the value of the land, whichever is lower".
In this case, we purchased the property in 2015 as a foreclosure for $220.5K , most likely under market value. We put about $40K in to the improvements and so have a cost basis of $260.5 K as of 2019 (the date placed in service. According the county assessor, tdhe value of the land at purchase was 40% of the total RMV. As of 2019 it has increased to 46% of RMV!! Both percentages seem way off base, especially since our real estate market here has exploded and as of 2019 the RMV of the property has doubled. Since the cost basis at purchase is much lower than the FMV at the date placed in service I am stuck with using that value. What I'm wondering is am I obligated to use the county assessor's land valuation to determine the basis for depreciation?
So your cost basis is $260,500. That doesn't change.
As for the basis for depreciation, you may want to contact a local real estate professional. Suppose the property in its current condition could sell for $280K; in that case your basis for depreciation will be $260.5 minus land value. Or suppose the market has gone down and the best you could sell for today is $250. Then your basis for depreciation will be 250 minus land even though you paid 260.
A local professional could give you a second opinion on the land value as well. (It's not impossible, there's apparently a shack in San Francisco that sold for $1 million just so it could be torn down to build something newer. In that case the land would be worth the $1 million regardless of what was built on top of it.)
In case of audit, the key is that your figure be "reasonable" and that you save your proof for as long as you own the property plus 6 years after you sell. The best definition of "reasonable" is common sense. The county assessment might or might not be reasonable, depending on how carefully the follow market movements and how often they perform reassessments.
