If you are placing your Condo into use as a rental property, the basis should be the lessor of
If you are required to use FMV because it's lower than your adjusted basis, then you allocate the land value proportionately based on the assessor's value. For example, if the FMV as of the time you began renting the condo was $300,000:
For this information at the IRS website, please refer to page 7 at the following IRS pub. https://www.irs.gov/pub/irs-pdf/p527.pdf
If you are placing your Condo into use as a rental property, the basis should be the lessor of
If you are required to use FMV because it's lower than your adjusted basis, then you allocate the land value proportionately based on the assessor's value. For example, if the FMV as of the time you began renting the condo was $300,000:
For this information at the IRS website, please refer to page 7 at the following IRS pub. https://www.irs.gov/pub/irs-pdf/p527.pdf
My accessor accessed the land and building value as 50% each and this screws up the depreciation for my condominium in Bay area California. How do i calculate the depreciation more correctly?
The tax bill value is not used on your tax return at all. The program only uses tax values to determine what percentage of your cost-basis is applied to the land value. That's it.
If your tax bill shows a total value of $100,000 and a land value of $25,000, then 25% of the total value is allocated to the land.
So if you paid $300,000 for the property, then 25% of that $300,000 is allocated to the land.
In the program you would enter $300,000 in the "COST" box, and enter 25% of that ($75,000) in the "Cost of Land" box.
This is assuming that what you actually paid for the property when you originally purchased it, was less than the Fair Market Value at the time you placed the property in service. Now-a-days, it is more common for the price you paid to be lower than the FMV.
Condo's don't usually have a land value because you don't really own the land individually ... the HOA owns the land ... so use a zero basis for the land.
@Critter - I'm hoping you can help me figure this out. You said in a previous comment:"Condo's don't usually have a land value because you don't really own the land individually".
I am having confusion over determining my cost basis for a condo rental I own. For some reason in my county, the land value is 72% of the total value of my condo (according to my tax bill). That seems odd to me. So little is dedicated to the building. So that lowers how much I can deduct for depreciation.
So you are saying I can start with the original purchase price as my cost basis? So if I bought it in 2010 for $205,000 that would be my basis plus any other improvements I have made (and other allowable closing costs, etc)?
You are correct on two key points.
On a separate issue. You purchased the condo in 2010. Is 2020 the first year that you're renting it? If so you are fine.
If you started renting prior to 2020 you should go back and amend those tax returns to include depreciation. You can amend tax returns for three years. you can amend 2017 up until April 15th 2020.
When you decide to sell the property you will have to recover ALL of the depreciation for all years whether you took credit on your tax return or not.
@JohnB5677 Hi John, I put the unit into rent in 2018. I did use the entire purchase amount as my cost basis for depreciation since I didn't think the land valuation was correct. And I did include the deduction for depreciation on those returns. So I don't have to amend those.
I live in San Diego county. I am not sure if they do things differently but my tax bill always shows Land and Improvement values. And the land represents 72.2% of the total amount and the Improvements is 27.8%. Maybe my county just charges condos differently than single family homes to make more tax revenue.
Do you think it's still ok to take depreciation on the entire amount of my condo value when I purchased? I don't have to subtract the land? The condo building has a lot of common area that is part of the association and the association pays taxes for the building itself and the land.
When I advise clients I typically suggest to do exactly what you just did. Get a city or county assessment and allocate based on percentage. However, 70% land does not sound correct. If it were the inverse I'd go with it.
You may be able to go to your Condo Association and try to figure out how much of the common space can be allocated to you.
@JohnB5677 I am the association president. Actually I think I am wrong about the association paying property taxes. I am not sure. I know the association pays taxes to the government based on our income we bring in, etc. I don't think we receive a separate tax bill from the city for the building since all of us owners each pay property taxes. So that would be the city double dipping.
It's just very odd that the land value is so high. And it's just condos in San Diego. I have seen single family tax bills where it's the inverse of the percentages.
There's 12 units so I would assume 1/12 of the common area is allocated to my unit. Maybe that is why the land value is so high. Still doesn't make sense.
Hello!
I am putting a personal residence into use as a rental property this year that was bought in 2016.
My purchase price is way below the current FMV so I will be using my purchase price for cost basis.
I am going to use the county tax assessment percentage to calculate the land value. HOWEVER the percentage between land and building changes every year. Would I use the current year's assessment or the assessment from 2016 to calculate the land value?
Publication 527 States:
"The part of the cost that you allocate to each asset is the ratio of the fair market value of that asset to the fair market value of the whole property at the time you buy it. If you aren’t certain of the fair market values of the land and the buildings, you can divide the cost between them based on their assessed values for real estate tax purposes."
Based on this I want to say I will use the 2016 tax assessment percentage for my calculation. But I want to be sure!
Thank you!
I am going to use the county tax assessment percentage to calculate the land value.
in some cases, this is not a valid method. some counties value land at x% of FMV while the building is valued a y% of FMV. check with your county's assessor's office. then you'll know how to use assessed value to allocate cost. (example land valued at 10% assessed value $10K thus FMV = $100K building assessed at 15% assessed value $75K thus FMV $500K . thus of your cost basis, 500/600 allocated to the building.
you would use the current year's values. what you cite is based on the property purchased being used immediately as a rental property. that's not your situation. for a better example read page 15 of PUB 527.
The assessment part I'm clear on it says this:
"This is notice of the January 1, 2021 assessed value of the above property. The assessment represents our estimate of 100% of the fair market value."
So the amounts provided for land and structure add up to the FMV. The problem is one year 12% of the FMV is land and 88% is Building. (Its a condo) Then another year is 11%/89%, 15%/85% and so on. If they used the same percentages every year this would be much more clear cut.
you have to ask then why the %'s change, not that it really matters. once the values are established (the year converted to rental) you don't change them in the future. you have the option to pay for an appraisal. by the way, the IRS has its own appraisers and they would likely come up with values that differ from your county's. if you got multiple independent appraisals they would likely differ from each other provided that the appraiser just didn't look at what the county put out. you see the words "our estimate".for me the words our guesstimate" is more proper. if you were to sell, I would be surprised if the gross sales price didn't differ from the total appraised value. the county only sees the outside. a buyer is supposed to get a disclosure of any defects and gets to see both the inside and outside.
I do have the same problem. I am also living in San Diego county and the assessor allocated 75% of the value to the land. it absolutely doesn't make sense. @abaldman were you able to find out how to adjust/change it.
It is up to you to determine land value vs property value. There are several ways to consider it. When you originally began to depreciate, you allocated a portion of the purchase price to land. You can use the same percentage. If you think the land appreciated more, give it a larger percentage. If you think the building appreicated more, give the land a smaller percentage.
Look up the land value in the appraisal that you ordered as a part of buying the property and getting a mortgage. If you did not receive an appraisal, look to the property's assessed value to obtain the value of the land, but ordering an appraisal may be a better choice. Land
Also, see this great post from @DianeW.
If you do not have any information to determine land value, the IRS auditor will not have any information either.
Percentage allocation is one way to make a decision.
If your personality is aggressive, you may want to allocate 80% of the value to the building and 20% of the value to the land. If your personality is conservative, you may want to allocate 60% of the value to the building and 40% of the land.
If you are not certain of the fair market values of the land and the buildings, you can divide the cost between them based on their assessed values for real estate tax purposes.