How is land figured in the basis for rental property?

[jamesrath1970]

I am trying to figure the capital gain on the sale of a rental house.  Building + improvements over the years + improvements current year + specials + sale of unit expenses - depreciation =  adjusted basis.  Gross sales - adjusted basis =  capital gain. Does the cost of the land only come into play when figuring the cost of the building when originally purchased? Or do I need to find the value of the land at the time of sale also and figure that in?

[RobertG]

You do not need to find the value of the land at the time of sale.

You can use the same percentage of land value that you used when figuring the cost of the building for depreciation purposes.

If 30% of the purchase price was for land, then 30% of the sale price can be for land.  It should not affect the taxable gain.

[jamesrath1970]

I did not include the cost of the land either at the beginning (purchase) or end (sale) of the property when figuring the adjusted basis.  So should I add the value of the land at the time of purchase and sale to the adjusted basis?

[RobertG]

No, the value of the land should not affect your basis when calculating gain or loss on the sale.

If you did not allocate any of the property to land when figuring depreciable basis do not allocate any of the sales price to land. 

It should not affect your gain or loss on the sale of the asset.

[jamesrath1970]

The value of the land was about $33,000 when purchased.  I subtracted this value from the total cost at the beginning for the cost basis.  The value of the land was about $58,000 at the time of sale. I did not take that into account for the basis.  If I don't account for the land in the basis, it seems like I will be paying capital gains on the $33,000 which I already paid at the beginning.  Shouldn't the original cost of the land be put back in to the adjusted basis so that I only pay capital gains on the $25,000 plus the building?

[JohnB5677]

I think you are looking at two different issues.  For the sale of a property the basis is going to include the structures, land, closing costs and improvements.  That is then compared to the selling price less closing costs, and that will yield your profit or loss.

On a separate note.  While you own the property you will have to depreciate it.  The basis is what you purchased it for plus perhaps some closing costs.  You will then separate the land from the structures.   The IRS does not allow you to depreciate land.  The balance of the structure basis will then be depreciated on an appropriate depreciation schedule.

[jamesrath1970]

Perfect.  Thank you!