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Something4Taxes
Level 2

Allocating Sale Price of Fixer: Keep original bldg:land or keep original land value?

House purchased one year, fixed up and rented. Sold next year for more. Not sure if should allocate sale price in same ratio as originally or just keep the land value the same and add the additional sales price to the home asset (and the related depreciable assets).

 

There wasn't enough time for the land to appreciate much if any, and with the exception of yard work all the additional value captured in the sales price came from the improvements to the house (and the psychology of the effect of seeing them already done and done well).

 

Usually you just keep the same ratio as originally, but that's because there is an assumption that it is livable and all, so most of the appreciation has to do with the passage of time and real estate values in general. Any improvements are added and it makes sense to keep the same ratios in most cases. This doesn't seem to apply to when major fixer uppers are bought, fixed, and sold though.. Any rules of thumb for the allocations on those? Is there some area in TT H&B for that?

 

Thanks!

2 Replies
ColeenD3
Expert Alumni

Allocating Sale Price of Fixer: Keep original bldg:land or keep original land value?

You can allocate in any way that makes sense. Since there were improvements to the house, it stands to reason it may be the reason for a higher sales price. 

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Carl
Level 15

Allocating Sale Price of Fixer: Keep original bldg:land or keep original land value?

How you allocate your sales price only matters to a certain degree. Things don't have to be allocated proportionally per-se either.  But there are a few ground rules.

 - If you have more than one asset listed in the Sale of Property/Depreciation section of the program. then you need to allocate your sales price of the structure (not the land) across all SEC 1250 depreciable assets.

 - If you sold the property at a gain, then you need to show a gain on all assets - even if that gain is $1 on some assets and thousands of dollars on other assets. This is the only way the program can correctly account for the required depreciation recapture.

 - If you sold the property at a loss, then  you need to show a loss on all assets - even if that loss is $1 on some assets and thousands of dollars on other assets. This is the only way the program can correct account for the depreciation recapture. If an asset was sold for less than it's adjusted basis (original cost minus depreciation)  this will ensure the program does not "do the math" to have you paying taxes on recaptured depreciation.

 

When you show a gain on some assets and a loss on other assets, it screws up the 4797 and SCH D and the program will not catch any error then, since as far as the program is concerned, the math "works out". (Even though the wrong math may be used.)

 

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