Sold Rental Propery - How To Allocate Gains To Various Assets

[bsluder68]

I sold a rental property I have been renting out for the last two years.  I have been depreciating a new roof on the rental property.  How do I allocate the gain and expenses between the land, structure and roof?  For example, assume at the time of first rental, cost basis of the house is $500,000, the cost basis of the roof is $30,000.  Assume the sales price of the rental property is $700,000 and the expenses for the sale are $10,000.  I can see in the tax records that the land is assessed at $100,000 but was only $95,000 when I bought the house.  I know similar questions have been asked before, but I can't find a situation similar to this one.  Thanks for any help.

[DavidD66]

I would start with the roof.  I would apply a portion of the sales proceeds that is equal to the book value (Cost basis less accumulated depreciation) to the sale of the roof.  This will result in no gain or loss.  For the remaining proceeds,  Allocate it to the land and the structure based on the ratio of their value for tax purposes.  For instance, if the tax assessor has the property assessed for a total of $600,000 - $500,000 for the structure, and $100,000 for the land.  You would apply 1/6 of the proceeds (after deducting the amount allocated to the roof) to the sale of the land, and 5/6 of the amount to the structure.

[Critter-3]

You need to allocate the sales price & cost of sale to all the assets ... this is something you must do yourself ... the program will not do it for you so get a pencil, paper and a calculator ... once you have your numbers the rest is easy.

Ok ... a simple example of ratios ...  if you have more assets than the example then you will have more lines.  Remember if you divide a big number into a littler number you get a % ...  thus 5000/100000 = 5%

       original  cost basis          ratios                  Sales price             cost of sale 

home    80000                   80%                          160,000               8,000

land       15000                   15%                           30,000                 1,500

roof        5000                        5%                           10,000                   500 

totals     100,000                100%                        200,000               10,000

All you need to enter into the program is the % of sales price & % of cost of sale for each asset ... IGNORE the depreciation taken as it is immaterial for the sales of the assets. 

[Mike9241]

the technically correct answer is to get the fair market value of each asset and allocate sales price and expenses accordingly.

a more practical answer is to allocate to assets other than the hone and land just enough of the sales price and sales expenses to have no gain or loss. then you can allocate the rest to the home and land in relation to their original cost or get an appraisal of them 

[bsluder68]

Thank you Mark.  This makes sense.  For the expenses of selling the house, is it acceptable to split them between the land and the structure only or do I need to allocate the expenses to land, structure and roof?  It seems that if I allocate the proceeds as you said, then allocate sales expenses in a similar manner, I get a net loss on the roof and my total tax bill goes down compared to netting the roof at $0 gain/loss and allocating expenses between the other two items.

[bsluder68]

Thank you Mike.  Your answer seems consistent with the others I received.

[bsluder68]

Thank you.  I follow the ratio explanation.  If I did the math correct, this has resulted in a net loss for both the roof and the land, which lowers my overall tax bill.  There is a net gain on the house (which I can exclude from capital gains since I lived in the house for 2 of the past 5 years).  I'm all for the lower tax bill, but is it acceptable to have a loss on one asset and a gain on another asset?

[ColeenD3]

Yes, since each asset has its own situation. This is why each asset is separated and treated individually.