I rented a condo, do to have to deduct the land value ? Thank you.

[Justin202203]

Hi,

I rented a condo, do to have to deduct the land value for depreciation? Thank you.

[LudwigVan_fan]

Land cannot be depreciated.  So yes, an allocation needs to be made between land and the building, and the land allocation subtracted from the basis of the property for depreciation purposes.

Also, Section 1245 should be separated as well, as they have different depreciation rules than Section 1250 property.

[JohnB5677]

Yes, You would get the land value from the town/city assessor's office.  It may be that the assessed land value is not included with the property in which case the land value is zero.

[Justin202203]

HOA confirm that I don't have the ownership of the land, only the condo, in that case , should I still deduct the land value?

Thank you very much.

[KrisD15]

Technically you own a share of the common land. 

Part of the value for the condo includes being on that property. 

When you allocate the land portion, only the condo will be depreciated. 

For example, value is 250,000. 

If you value the land at 10,000, you will be depreciating 240,000 over 27.5years. 

When you sell, say for 320,000, you will again allocate part to the land. 

If you only allocate 10,000 to the land when you sell, you will also "recapture" depreciation you took on the condo over the years. lets say you claimed 60,000 in depreciation.

(you don't have a choice, you cannot elect to not claim depreciation, it always needs to be recaptured, or "paid back") 

How the land is valued could make a difference when you sell.

You can use your share of the assessed tax value of the land. 

Example one:

So sell 320,000

10,000 to land (no gain no loss)

310,000 to condo (310,000 - 240,000 = 70,000)

60,000 depreciation recapture (reported and taxed as ordinary income) 

10,000 Capital Gain

Example Two:

Say the area encountered something that made the land value rise more than the building-

So sell 320,000

25,000 to land (15,000 capital gain)

295,000 to condo (295,000 - 240,000 = 55,000)

55,000 depreciation recapture (reported and taxed as ordinary income) 

You would have more capital gain and less ordinary income

[LudwigVan_fan]

No, don't subtract the land value.  HOA owns the land.  You own a piece of the air space over the land.  And you may not own all of that.  For example. you may own the interior walls, but the exterior is HOA owned.  Same for the roof and possibly other things as well.

When you bought the condo, you also bought into the HOA...but that is not the land. 

[Justin202203]

Hi ChrisD,

In the case you mentioned below, during rent/leasing period, should I use 240,000 to depreciate or  250,000 to depreciate it?

Thank you very much.

-----

Here is the case:

When you allocate the land portion, only the condo will be depreciated. 

For example, value is 250,000. 

If you value the land at 10,000, you will be depreciating 240,000 over 27.5years. 

When you sell, say for 320,000, you will again allocate part to the land. 

[Justin202203]

Hi,

Could  you please help to reply? Thank you very much.

[LudwigVan_fan]

@KrisD15    @Justin202203 would like a response.

In searching the internet, the places I found say you don't own any specific land.  You own a percentage in the common land and common spaces.  This link (only one of several...do a search using something like "do you own the land when you buy a condo"

https://www.nolo.com/legal-encyclopedia/buying-condo-what-property-will-you-actually-own.html

In my opinion, unless your RE tax statement or some other document breaks out land from your condo, I would not deduct a land price.  How do you determine what percentage of the value of the all the common own land is yours?   Others also own a percentage of the land under your condo.

[Justin202203]

@LudwigVan_fan  Thank you so much for your reply.

Then if the County Property Tax department tell me that there is land value when I bought it, then I should deduct?

[LudwigVan_fan]

@Justin202203 Yes, if the Property Tax department says there is land value, then deduct it from the amount to be depreciated.

You might also look at your purchase documents and see if they say you own land.  Talk to head of Condo Association...I'm sure this has been brought up and discussed

[Justin202203]

@LudwigVan_fan @KrisD15 

Thank you very much.

Could you please explain a little bit more regarding recapture depreciation when sold the condo? 

[Justin202203]

@LudwigVan_fan @KrisD15 

Sorry I think I can understand the recapture depreciation when sold the condo. Still two other questions:

1. Where can I get the land value and building value when sold? From County property tax department?

2.Right now the situation is in 2019 I didn't deduct the land value because of thinking no ownership, it's only rented less than half year, but in 2020 I deduct the land value based on property tax department.

Which year should I correct the tax return or I can wait to recapture when I sold it?

PS: Based on HOA, no ownership of land, based on property tax department, there is land value.

Thank you.

[LudwigVan_fan]

First; recapture

https://www.irs.gov/instructions/i4797

https://www.irs.gov/publications/p527

When you sell it, your sale price gives you the total price.  You would allocate the sale price between land and condo.  Seller and buyer need to agree.  You state the property tax department has land value.  There seems to be some conflict between property tax and HOA.  But if property tax breaks it out, it should probably be allocated for federal income tax as well.

One method would be to use the property tax department ratio of land value to total value.

For 2019, you claimed too much depreciation and underpaid taxes.

For 2020, your depreciation should have been correct as you deducted land value.

Which ever year you sold it, you would be looking at depreciation recapture (if applicable)