Property purchased for rental -- Seller Credit as it applies to Cost Basis

[myraccoon]

There is quite a large seller credit on my purchase of a home to be used as a rental property.  In calculating the cost basis of the home (for depreciation), is seller credit subtracted from the cost basis?  In other words, can seller credit be arbitrarily assigned to the land value to maximize cost basis?

[Anonymous_]

What exactly is the seller credit?

Almost certainly, you will have to allocate it between the land and structure.

[myraccoon]

The seller credit is NOT specified whether it's applied towards the loan, repairs, commissions, principal, etc.  It's just an unspecified line item.  Seems that I multiply by the % structure/total and apply against the basis?  

[Opus 17]

Your cost for the property is your net cost, after all credits and adjustments.  It doesn't really matter what the credit is for–repairs, or help with closing costs (you pay a higher price and they pay your closing costs), or something else.  Your cost basis is your net purchase price.  (You can also include some of the legal transactional costs of the purchase like a county transfer tax.  See publication 523 for adjustments to basis, they apply to rentals as well as personal real estate.)

https://www.irs.gov/forms-pubs/about-publication-523

I don't think there is a black and white rule about "allocating" the cost between land and structures, other than you must accurately reflect the value of the land, and there is probably something in the regulations about your method being "reasonable."

I wouldn't think about allocating percentages, I would think about the whole net cost.  For example, if the listed selling price is $250,000 and you are getting a seller credit of $20,000, you would just think about the net price being $230,000 and then determine how much of that is land.  There's no set percentage or rule of thumb, it depends on market conditions in your community.  The real estate agent may be able to suggest a figure.  

[Anonymous_]

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@Opus 17 wrote:

I don't think there is a black and white rule about "allocating" the cost between land and structures, other than you must accurately reflect the value of the land........

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An allocation is required to be made since there is no depreciation allowance for land per Section 1.167(a)-2.

[Opus 17]

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@Anonymous_ wrote:

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@Opus 17 wrote:

I don't think there is a black and white rule about "allocating" the cost between land and structures, other than you must accurately reflect the value of the land........

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An allocation is required to be made since there is no depreciation allowance for land per Section 1.167(a)-2.

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I think the question was how to allocate the "seller discount" between the land and the structures.

[Anonymous_]

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@Opus 17 wrote:

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@Anonymous_ wrote:

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@Opus 17 wrote:

I don't think there is a black and white rule about "allocating" the cost between land and structures, other than you must accurately reflect the value of the land........

---

An allocation is required to be made since there is no depreciation allowance for land per Section 1.167(a)-2.

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I think the question was how to allocate the "seller discount" between the land and the structures.

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I think the answer would be in the same manner the purchase price is allocated between the land and the structure.