@Lizy wrote:
Ok, this is very helpful!
1) I know that the land and property ratio is consistent at 30% : 70% based on actual land dollar values written on my subsequent tax assessments received after purchase.
2) however my purchase price is higher than the subsequent assessed property values written on my tax property taxes.
3) I understand the tax assessed value is not the same as the “Fair market value”, so, clarification question: I should not use the property tax section as per your note and then I should use the cost of the property (actual purchase price + allowable fees during purchase) in the Cost section of software, and the land value would then be 30% of the original purchase price (not the land value written on the tax assessment document)
is this a correct understanding? Am I mixing things?
Your cost basis for depreciation when you place the property in service is your adjusted cost basis, or the fair market value, whichever is lower, for the structures only and not the land.
Your adjusted cost basis is the original price you paid, plus the cost of permanent improvements. Improvements, or "betterments", make the property more valuable or extend the useful life of the property or one of its major subsystems. A new roof is an improvement, since it extends the useful life of the roof. A patch repair after a tree limb makes a hole is not an improvement since the overall roof structure is left in as-is condition. Only count improvements that are still part of the property. If you replaced carpet with wood flooring in 2010, and replaced the wood flooring with carpet ini 2020, disregard the cost of the wood flooring and only include the 2020 carpet.
Your cost basis for the land is what you paid for the land, it is not adjusted by improvements, and it is not adjusted by fair market value because your cost basis for depreciation is the lower of your adjusted cost basis or fair market value. The tax appraisal may be a reasonable guide to the value of the land, but is not guaranteed to be, and if audited, you may have to prove that the tax assessment is on target.
Let's assume the property cost $100,000 and you've made $50,000 of improvements, and the current fair market value is $250,000. If we assume that land is a constant 30% of value, then your basis for depreciation is either $105,000 (70% of your adjusted basis), or $120,000 (70% of the purchase price plus $50,000 of improvements). I would tend to think the latter, since you didn't improve the land, just the structure. Your basis is not any percentage of the current FMV.
