Is the proportion method the only acceptable way of determining land vs building cost?

[awbaldi]

First-year changing a property from a primary residence into a rental unit. It is a second-floor condo within an HOA with no direct ownership over the land. On the tax assessment the land value is 53% of the total assessment. This effective cuts my depreciation base into half of the cost basis. Is this the only acceptable way to determine this. Can I just subtract the tax assessment land value from the cost basis. I.E. say land assessment was $75,000 and cost basis was $400,000. Does the decpreciation basis need to be $188,000 or can it also be $325,000? If I contact the tax assessment office and they adjust this ratio in the future is there anyway for this to be corrected in the future? Thank you in advance.

[Anonymous_]

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@awbaldi wrote:

.....Can I just subtract the tax assessment land value from the cost basis...

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Is the assessment broken down into two separate components (land and unit) by actual value (dollar figures) rather than just percentages? If so, you can most likely use the figure provided by the assessor.

If not, you can always try to contact the assessor's office and request an adjustment. Regardless, with the numbers you provided, you will have about a $5,000/year differential over a 27.5-year recovery period so it might not be worthwhile especially considering the accumulated depreciation deductions will be subject to recapture if and when you dispose of the unit.

[awbaldi]

It is broken out by dollars. It states, the land is $75,000. Would this be enough basis for the IRS to claim that the depreciation basis would be cost basis minus this $75k instead of doing proportions?

I know the difference results in ~$5k in depreciation expense per year and you mention that doesn't seem like a lot, but it would be between $1,100 to $1,600 in tax savings per year depending on which tax bracket we fall into. Again not earth shattering, but I don't like to pay anymore than I'm required to.

[Mike9241]

one issue is that there are many different methods used by assessors across the country. so we really have no way of knowing if that $75K would be proper to subtract from the cost or use 47% for the structure. it could be land is assessed at A% of Fair Market Value with rate B while the structure is valued at C% of Fair Market Value with rate D. 

if land and structure are being assessed differently then a 53%/47% split would not be appropriate. 

you do have the option of hiring an appraiser to give you valuations based on the date you purchase it,

note that the iRS, if you are audited,  could challenge this. but if the appraiser does their job fairly, you have a good chance of prevailing.