Land value after the property appreciates

[wendyle1993]

I used 20% land value during the rental period. I sold the property last year, and the house has appreciated. Should I still fill in the same land value (keep the $ the same) or keep % the same to have increased land value (20% x selling price)? 

[MinhT1]

You should not change the cost bases for the house and the land, and keep them at the values you used during the rental period.

[wendyle1993]

Understood. What about the sales price for the asset and land if the sales price is more than the purchase price? Should I use the same % to allocate between house and land, or keep the land the same as the cost basis and add all the price appreciation to the house?

[AmyC]

1. The sales price is usually more than the purchase price. Otherwise, you would be losing money.

2. The sales price and expenses are allocated to the house and land. The land price should have risen over time. Two common methods:

• Original purchase price, keep the same percentages you used when you placed the rental into service.
• Current assessment - property tax bill may have the value of the building and/or the land

Example:

Let’s say you bought for $100k (20% land) and sold for $200k.

Incorrect (Freezing Land): You claim Land = $20k and House = $180k. You are reporting a massive gain on the house, potentially triggering more recapture.

Correct (Proportionate): You apply that 20% to the new price. Land = $40k and House = $160k.