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]

House was purchased few years ago and now converted to a rental. The land is 30% of the total value. Thanks

[npierson7]

The Improvement value is the difference between the total purchase value and land value, plus the cost  of buildings and improvements added.

[Lizy]

Just to clarify. You mean improvement value = total purchase - land value + improvements. And cost of building is total purchase  minus land value. Correct? I appreciate the quick response thank you! 

[ToddL99]

Precisely where are you being asked to enter an "improvement value"?

[Lizy]

I am being asked this under Rental property section, in the page “Enter Property Tax values”. Only 2 questions are asked on the page “Land value” and “improvement value (includes buildings, structures, fences, decks, etc..)”

[JohnB5677]

This question occurs because of the depreciation schedule.  Land does not depreciate.  So the value you put in Improvement value will be the depreciable amount.

If you take the original purchase price you will have to split it into the two categories.  One way to determine this is from your real estate tax bill.  Some communities will allocate taxes based on structures and land.  You can allocate based on a percentage of each number.

If it is not readily available on the tax bill you may be able to obtain it from your town hall.

[AmeliesUncle]

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@Lizy  wrote:

I am being asked this under Rental property section, in the page “Enter Property Tax values”. Only 2 questions are asked on the page “Land value” and “improvement value (includes buildings, structures, fences, decks, etc..)”

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If you already know the value of the land, you shouldn't even be in that section.  That section is for estimating the value if you DON'T know the value of the land.

BEFORE you get to that screen, it SHOULD be asking for (a) the TOTAL cost (building and land) and (b) the value of the land.  If you know both of those numbers, that is what you should enter there, and you should not be in that 'property tax' section.

[Lizy]

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? 

[AmeliesUncle]

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@Lizy  wrote:

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?  

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Yes.

[Opus 17]

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@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? 

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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. 

[Lizy]

Hum...it turns out the “enter property tax values” section is required. If I do not enter any value, it says I have zero depreciation.  I am using a prior year TurboTax premier software, not 2020.

[Lizy]

@Opus 17  Very helpful details, many thanks!! I got the difference between adjusted cost basis and FMV, the permanent improvements concept as you explained and your example below. 

i am using TurboTax premier 2017 software and trying to make sure I am giving the info required by the software. 

1)it starts with  “enter purchase price”, where it wants the “original price you paid” to “help determine depreciation” so I entered it without any allowable purchase related escrow fees.

2) Then it asks “Fair Market Value” - the value is not relevant as it is much higher than my purchase price even with allowable purchase fees and improvements included. And therefore I assume the software will not used this FMV for depreciation

3)  then it asks “ escrow fees “ for fees when I bought the home. And “improvements”

4) then it asks to “enter property tax values” and this is where the problem was. The instructions acknowledge that “assessed values” may not be reliable if improvements have been made but to still  use the “assessed land value”. But for the “improvement value”, it says to “enter the value of the improvements based on your cost for that portion of the property, plus improvements you added after purchase”

Question: so, the software expects that I enter the assessed land dollar value for the *year the home is being used as rental* and for the improvement value, it seems to want me to use the cost of the home (which would be *based on a prior year* when the home was purchased + allowable escrow fees + improvements but minus the land value from the year the property is being rented).

it’s this last piece I need to be 100% sure because it would be using values of 2 different years to answer the question and I am required to answer land and improvement values question 😓

[Carl]

The TurboTax program uses information from your latest property tax bill for the sole and only purpose of determining what percentage of what you originally paid for the property, was paid for the land. That's it. Nothing else.

Information on your property tax bill may be presented in many different ways. It just depends on how your property tax office does things. For example, mine shows like this:

Total Value: $250,000
Land: $75,000

With that, I can do the simple math and see that my improvement value is $175,000

In other areas, the property tax bill may show like this:

Structure: $175,000

Land: 75,000

Again, with some simple addition, I can see my total tax value is $250,000. But in both examples above, only 30% of the value is assigned to the land. The other 70% is assigned to the structure and other items that are on that land.

Understand that the values shown on the tax bill are not anywhere close to what you actually paid for the property. On average the tax value will be 30% less (give or take) than it's actual market value (called Fair Market Value) if you were to actually sell it.  The program just uses your input from that tax bill for the sole purpose of determining what percentage of what you originally paid for the property, gets allocated to the cost of the land. That's it. Nothing more. Nothing less.

[Lizy]

@Carl Perfect explanation! I have entered the assessed land amount in the “land value” section (corresponds to 30%) and the assessed “buildings” amount in the “improvement value” section (70%).  Many thanks!

I hope TurboTax corrects their instructions in the software because it leads to a completely different number than your advice. 

[Carl]

I hope TurboTax corrects their instructions in the software because it leads to a completely different number than your advice.

There's really nothing wrong with it, and there is no "perfectly" correct way to state it. Some tax bills will call it land value and structure value. Others will call it Total Value and Improvement value (where improvement value is that portion of the total value given to the structure) and still others will call it total value and land value (where the difference is the structure value). So there is no "perfect" way to word it that will make everyone happy. Just flat out not possible.

Also, as a first time landlord (or first time using TurboTax as a landlord) here's some clarifications you will need, that the program (in my personal opinion) doesn't provide. Take special note that "absolute" "perfection" is not an option in the first year of using TurboTax with rental property. It's an absolute *must*. Even the tiniest of mistakes *will* grow exponentially over time. Then when you catch it later down the road (if the IRS doesn't catch it first) the cost of fixing it will be quite high.

I also recommend that you do "not" include any property improvements that you did after your initial purchase of the property, in your cost basis of the actual property itself. (but you can if you want.) When you add your property improvements to the cost basis in the "initial" entry for the property itself, the program incorrectly assigns a portion of the cost of that improvement to the land. So for any property improvements you did "after" you purchased the property, enter those improvements as a separate asset in the Assets/Depreciation section.

Rental Property Dates & Numbers That Matter.

Date of Conversion - If this was your primary residence or 2^nd home before, then this date is the day AFTER you moved out, or the date you decided to lease the property – whichever is later.
In Service Date - This is the date a renter "could" have moved in. Usually, this date is the day you put the FOR RENT sign in the front yard.
Number of days Rented - the day count for this starts from the first day a renter "could" have moved in. That should be your "in service" date if you were asked for that. Vacant periods between renters count also PROVIDED you did not live in the house for one single day during said period of vacancy.
Days of Personal Use - This number will be a big fat ZERO. Read the screen. It's asking for the number of days you lived in the property AFTER you converted it to a rental. I seriously doubt (though it is possible) that you lived in the house (or space, if renting a part of your home) as your primary residence or 2nd home, after you converted it to a rental.
Business Use Percentage. 100%. I'll put that in words so there's no doubt I didn't make a typo here. One Hundred Percent. After you converted this property or space to rental use, it was one hundred percent business use. What you used it for prior to the date of conversion doesn't count.

RENTAL PROPERTY ASSETS, MAINTENANCE/CLEANING/REPAIRS DEFINED

Property Improvement.

Property improvements are expenses you incur that “better” the property. Basically, they retain or add value to the property. Expenses for this are entered in the Assets/Depreciation section and depreciated over time. Property improvements can be done at any time after your initial purchase of the property. It does not matter if it was your residence or a rental at the time of the improvement. It still adds value to the property.

To be classified as a property improvement, two criteria must be met:

1) The improvement must become "a material part of" the property. For example, remodeling the bathroom, new cabinets or appliances in the kitchen. New carpet. Replacing that old Central Air unit.

2) The improvement must retain or add "real" value to the property. In other words, when the property is appraised by a qualified, certified, licensed property appraiser, he will appraise it at a higher value, than he would have without the improvements.

There are rules that allow you to just flat-out expense and deduct some property improvements, if the total cost of the improvement was less than $2,500. It’s referred to as “safe harbor di-minimis” But depending on the specific situation, this may or may not be beneficial. Just be aware that not every property improvement that cost less than $2,500 qualifies for this. If this interest you, the rules can get complex. So a good place to start reading is on the IRS website at https://www.irs.gov/businesses/small-businesses-self-employed/tangible-property-final-regulations. The stuff on di-minimis starts about one page down.

Cleaning & Maintenance

Those expenses incurred to maintain the rental property and it's assets in the useable condition the property and/or asset was designed and intended for. Routine cleaning and maintenance expenses are only deductible if they are incurred while the property is classified as a rental. Cleaning and maintenance expenses incurred in the process of preparing the property for rent are not deductible.

Repair

Those expenses incurred to return the property or it's assets to the same useable condition they were in, prior to the event that caused the property or asset to be unusable. Repair expenses incurred are only deductible if incurred while the property is classified as a rental. Repair costs incurred in the process of preparing the property for rent are not deductible.

Additional clarifications: Painting a room does not qualify as a property improvement. While the paint does become “a material part of” the property, from the perspective of a property appraiser, it doesn’t add “real value” to the property.

However, when you do something like convert the garage into a 3^rd bedroom for example, making a  2 bedroom house into a 3 bedroom house adds “real value”. Of course, when you convert the garage to a bedroom, you’re going to paint it. But you will include the cost of painting as a part of the property improvement – not an expense separate from it.