Author Topic: How to determine allocation between land and building for depreciation?  (Read 8894 times)

brooklynguy

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I have always done my own taxes and this year for the first time I have a rental property in the picture.  I understand that I can take depreciation deductions against the cost of the building but not the land.  Can anyone offer any advice on how to allocate between the building and the land?  The property is in New York City, where the local real estate tax assessments do not provide a break-down between land and improvements, so I can't use that for guidance.  It seems difficult to make this determination based on market comps (since there are basically zero sales of pure tracts of land in the neighborhood).  I have asked around a bit and got wildly different answers from local landlords about the allocation they used (ranging from 50/50 to 90/10 (building to land)).  Of course, the more that gets allocated to the building the better, but how does one go about picking an allocation that is supportable and won't raise eyebrows at the IRS?

Thanks very much in advance for any help.

Cheddar Stacker

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Re: How to determine allocation between land and building for depreciation?
« Reply #1 on: January 07, 2014, 01:09:42 PM »
I'm a St. Louis CPA so I have the tax experience, but thus far I have accumulated very few real estate investments. The real estate experts might have a better take on this, and you might want to get a more local/regional opinion as I think this can change by location, but for what it's worth here's my two cents.

We use a flat 10-15% allocation to the land for real estate clients at our firm, unless there is a strong reason to choose another percentage/dollar amount. I've never been part of an IRS audit where this allocation was in question, so I'm unsure if it would hold up. Obviously as you mentioned the more you allocate to building the more depreciation you can deduct. A high building % is aggressive, and the IRS might not like it.

Also, when you sell the real estate, every dollar you depreciate (which saves you ordinary tax rates) decreases your costs basis, therefore it increases your capital gain (which is paid at the lower cap gain rates, but subject to depreciation recapture(25%)). This is ultimately a good thing in the long run, but it can create a large tax bill at the end of the venture if you simply sell.
« Last Edit: January 07, 2014, 01:55:21 PM by Cheddar Stacker »

Johnny Aloha

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Re: How to determine allocation between land and building for depreciation?
« Reply #2 on: January 07, 2014, 05:11:06 PM »
That's a tough one.  If your county website doesn't provide the breakdown, do you have a recent appraisal?  That should also provide a breakdown.

If you don't have an appraisal, I'd pick a ratio that seems reasonable, and document your reasoning.  A 15% land value in Manhattan does not seem reasonable.  My guess is that it's more like 50-70% land value.  FWIW, my land is about 67% of value. 

 Note: I am not a CPA, and all the other disclaimers.  This is not tax or legal advice!

brooklynguy

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Re: How to determine allocation between land and building for depreciation?
« Reply #3 on: January 08, 2014, 09:31:36 AM »
Thank you.  I do have an appraisal, which shows the land value as 57.5%.  I'm not convinced this is accurate, but I suppose it's the best guidance I have and should provide good support for my allocation in the event of an audit.

Midwest

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Re: How to determine allocation between land and building for depreciation?
« Reply #4 on: January 08, 2014, 11:46:23 AM »
In the absence of an appraisal, we look at the county auditor for guidance on the breakdown between land and building.

Midwest