Can someone give me a very precise answer about what to enter in “improvement value”? Is it the total purchase value minus land value plus costs of improvements?

[Lizy]

@Carl @Your clarifications, detailed explanations, references, and advice were just great, to the point, and complete. I have now completed the section which was confusing.

Of note, I included cleaning and painting as maintenance routine rental expenses because it was incurred during the rental period.

The comment that TurboTax needing to correct instructions in the “enter property tax values” section was not referring to the terminology of land, buildings, structures, improvement value, ... (many thanks for your clarification). It referred to the instructions that improvements made after purchase should be added in the “improvement value” which would have actually made the software miscalculate the 30/70 land/improvement value percentages. I spent over an hour on the phone with customer service yesterday after spending hours on previous days trying to find answers online and few people were just as confused as me and there were inconsistent /unclear answers in the community, hence the reason I posted my question. I hope they have corrected subsequent versions and can alert those purchasing previous year versions. But I greatly appreciate people like you available for the clarification. 🙏 Best regards 

[Carl]

It referred to the instructions that improvements made after purchase should be added in the “improvement value” which would have actually made the software miscalculate the 30/70 land/improvement value percentages.

Exactly. That's why I say to enter any property improvement done "at any time" after your initial purchase of the property, as a physically separate item in the Assets/Depreciation section.  For others reading this:

Say you purchased a property for $100,000 and 30% of that is for the land. That means that $30,000 is allocated to the land and is not depreciated. Not ever. The $70,000 value for the structure is what gets depreciated over time.

Now lets say immediately after you purchased the property you paid $25,000 for a new roof. If you include that $25K in the original purchase price, that makes your cost basis $125,000 now. So far, so good. But the problem arises when the program allocates 30% to the land. That's $37,500 that is not depreciated, and only $87,500 to the structure, and that $87,500 is what gets depreciated. That's not really right.

If 30% of your original purchase price is $70,000 and you paid $30,000 for a new roof, then that should have no effect what-so-ever on what you paid for the land, and your structure value should be $95,000 that gets depreciated.

If you enter the roof as a physically separate asset, then the program will correctly depreciate the full $25,000 you paid for that roof, and also still depreciate the $70,000 you paid for the structure.

[Opus 17]

I'm too lazy to re-read the whole thread and catch up, but one thought occurred to me that there might be some confusion over the term "improvement."

In one sense, improvement means anything done to real property that becomes a permanent part of that real property.  Remember that "real property" means real estate or land, only.  An "improvement" to real property includes anything you do to the land to add value, including building a structure, installing water and sewer lines, or landscaping.  (In contrast, parking a mobile home on your property is not an improvement because it is not permanently attached to the real property, although the water and sewer hookups are property improvements.)  So one sense of the question "Is your real property improved" is asking, "what is the value of the stuff that has been built on or is attached to the land?"  And an "unimproved lot" might have been cleared and surveyed for a building, but is still unimproved until something is actually built on it.

Another sense of improvement, of course, means new things you did to the property after you bought it to add value.  Here, "betterment" might be a less ambiguous word.  So in one sense, adding a deck to your house is an improvement to the house and also a betterment, while in another sense, the entire house is an improvement installed on the real property (the land).  

So when you first enter property for depreciation as a rental or other commercial use, the question "what is the value of the improvements" is asking for the value of everything permanently attached to the land, which becomes the basis of depreciation, regardless of whether it was recently "improved" in the sense of a betterment.

Does that help?

[colqull]

My property tax notice only gives me Fair Market Value and Assessed Value (which are the same number).  It's about $140,000 less than I paid.  Also, it DOES NOT give me any land value.  What should I do?

[Opus 17]

@colqull 

Your property tax bill is not a very good way of determining fair market value for real estate. There’s a lot that goes into a property tax assessment and they don’t always reflect reality. Best that you talk to a real estate professional.

[Carl]

My property tax notice only gives me Fair Market Value and Assessed Value (which are the same number). It's about $140,000 less than I paid. Also, it DOES NOT give me any land value. What should I do?

While I have heard of this, it seems to me to be rather rare for a property tax bill to not have separated tax values. I've seen where they have total value, and then a separate value for the structure. Usually, anything of value on the land is referred to on the tax bill as something like an "improvement value" or the such. Simple math gives you the assessed value for the land.

I've also seen the reverse where the tax bill gives total assessed tax value and separate value for just the land. Again, simple math gives you the assessed tax value for the structure, sometimes referred to as "improvements".

The assessed tax values are not to be used as the value for depreciation. The program will ask you for tax values only for the purpose of determining which percentage of your original purchase price gets applied to the land, with the remainder applied to the structure for depreciation.

When placing a rental property "in service" depreciation is based on the "lesser" of what you originally paid for the property, or it's FMV on the date placed in service. Typically, what you originally paid for the property will be the lesser value, and is what gets used for depreciation.

Note also that what you originally paid for the property can also include what you paid for any property improvements before the property was placed in service as a rental. But still, that value will most likely still be lower than what you would get for the property at FMV if you sold it.