Depreciation of rental condo; I think tax prep made a mistake

[sscaminky]

I bought a condo in 2010 and paid more than the property tax assessment. It was rented out for all of 2017 and 2018.

A tax preparer did my 2017 taxes. For the "cost" in depreciation, she used the amount I bought the condo for in 2010. That makes sense to me. However, she did not (apparently) use property tax records to assess the land and structure independently.

Doing my own taxes this year, I think that's a mistake. 

1. Are there any other reasons she might have claimed the purchase price instead of just the structure? I don't think it's in my CC&Rs.

2. To calculate the % that's structure vs. total, do I use the 2016 tax assessment (when I started renting it)? Or the 2010, when I bought it?  I plan to apply that % to the purchase price in 2010 to find the base "cost."

[Carl]

1. Yes. If your condo ownership deed does not indicate that you own any land, then the preparer would have not allocated any of your cost to the land. Depending on the specifics, the preparer may have been wrong or right in their decision.
2. The tax assessment numbers are not used on your tax return per-se. That tax assessment is used by the program solely for the purpose of determining what percentage of the assessed tax value is allocated to the land. Then the program applies that percentage to what you actually paid for the condo to allocate that percentage of your cost-basis to the land.

Now generally speaking, unless it's specifically stated in your purchase contract and/or property deed that you do not own any of the land, it's standard practice to allocate some of your cost basis to the land. But does your property tax bill break it down and specifically show that some of your property tax is for land? If so, then you "should" allocate that same percentage of your cost basis to the land. That would be easy enough to fix by amending the 2017 tax return.
However, you would need to amend the 2017 return *BEFORE* you can even start reporting it on the 2018 return so that on your 2018 return you can show the "correct" amount of prior year deprecation already taken.

[sscaminky]

Thank you, Carl!

My past property tax assessments (supplied by the county as "tax roll history") break it down into assessed value of land, structure, and total. That's why I think it's appropriate to use the structure % rather than the entire amount.

But obviously that % varied in 2010, 2016, and 2018. So which year's percentage do I use? 2016 is when I started renting out the condo, so that is my assumption. I would apply 2016's percentage of structure/total to the 2010 purchase price to arrive at my cost.

Ugh. Lucky I'm getting a refund, so I can file for an extension and start the process of amending 2017 taxes.

[Carl]

When the program asks, enter the numbers from your "last" tax bill. So when amending the 2017 return, your last tax bill will be the one for the 2018 property taxes. Then since 2017 was the first year you rented out the property, it's possible that you very well may have to pay back some of that 2017 refund. But no big deal really since you're only talking about one year, and the first year of rental at that.

[sscaminky]

THANK YOU!!

[Carl]

Generally speaking, I've seen it both ways with a condo. It's somewhat of a "grey area". But I go by what is says in IRS Publication 527 at <a rel="nofollow" target="_blank" href="https://www.irs.gov/pub/irs-pdf/p527.pdf">https://www.irs.gov/pub/irs-pdf/p527.pdf</a> on page 15:
"If you own a condominium, you also own a share of the common elements, such as land, lobbies, elevators, and service areas."
So with that, if there is no land allocation on the property tax bill, I figure if one allocates at least 10% of their cost basis to the land at an absolute minimum, that should suffice.

[Carl]

https://ttlc.intuit.com/replies/3288565