splitting the house sale price between asset and land?

[twistedether]

Because I sold a rental property, I am being asked to separate the "sales price" between the "asset" and the land based on their "fair market value". How am I supposed to differentiate a single sale price amount between the home and the land? The county assessment records until 2017 show a 50/50 split. But clearly, when I sold the home in 2018, my home price was significantly higher.

In specific numbers, Land assessed value was $329,213 and "Improved" (i.e. the asset) assessed value was $329,213 yielding to a total of $658,426. This record is for 2017. County has yet to do 2018. I sold the house in 2018 at the sale price of 1,520,000.

I was wondering if one way to calculate the asset value as (total sale price - land assessed value in 2017). So in this case it would be 1,520,000 - 329,213 =1,190,787. It may still not be accurate since I am using the 2018 sale price against the 2017 assessed value. But if IRS is not that particular about this, could this be a way to go? If I am getting it completely wrong, please advise.

Secondly, what happens if I got the differentiation wrong? From the perspective of how much amount I owe in taxes, what is the negative impact? From IRS perspective, if I got this wrong, can I get audited for something like this?

[MaryK1 · Accepted solution]

When you are doing then land/building split, you can use the same percentage amount you used when you started depreciating (which you can fund in your tax filings) - or as in this case- the split from the property appraiser.  The IRS will look for what is "reasonable" so as long as you keep records of how you calculated the amounts, it is unlikely to challenge.

For example, sometimes either the land or building value as a percentage of the whole will change- if the area becomes "prime" but the building is older (and properties in the area are bring torn down and replaced with new buildings) or you have significant building improvements (which would have been included in depreciation regardless).  As long as you keep the records (including printouts of comps and tax record) you should be okay.