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How do I determine the value of my home and the value of the land to determine depreciation?

The house is located in Franklin County, Pennsylvania in Mercersburg.
  • April 24 2011 - Montgomery Township
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Answers (6)

Hi Wazy,


2010 definitely won't change your 2009 return. Just make sure it is enough money saved to go back and redo it. You should talk to a CPA but I think you could just add the 2009 depreciation to your 2010 tax return and just keep a note on what you did. But, have a tax person bless that.

I don't use turbo tax so I'm not sure, but millions of people do so post it on zillow and hopefully someone will answer.

Thanks!
  • April 30 2011
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Prfessor Baron,

Yes, all the numbers that you re-annotated below are correct.  And, thank you for your assistance in helping me to understand how to perform the depreciation on the home over 27.5 years.  There did not seem to be specific information on how to do so. 

Will Turbo Tax make the correction / adjustment for 2009 as I put the property in rental status then, or will I need to submit an amended 2009 tax return?  It is my understanding that I will need to do so as making the change on the 2010 tax return does not automatically adjust the depreciation on the 2009 tax return.

Thanks again for your assistance.  I appreciate it! 

Have a good weekend!

Regards,

Howard
"Wazy"


  • April 30 2011
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To get the building percentage let's work with the prior assessed value, NOT your purchase price...at first.

So per the info your indicated your total assessed value on the county tax rolls is $890 (land) + $37,680 (building) = $38,570. <= is the right?

So the building component is: $37,680/$38,570 or 97.6%. If land is really worth that little in your area...so the lot if it was empty would be worth about 2.4% (100% - 97.6%) of the market value today (mkt value is the $300k you paid for lot and house), so that is 2.4% X $300,000 your purchase price or $6,922 value of the lot. That might be about right in Mecersburg (I am from Virginia so I know $7000 for a lot isn't out of bounds)....but it does sound low. Ask your realtor what they think the lot is valued at...or if there are any comparable lot sales nearby and recently sold.

If you come to the conclusion that the lot alone is worth ONLY the $7,000 - and keep your supporting documentation to show an IRS person if you get audited, then your depreciable basis would be the remainder or $293,000 - which you depreciate over 27.5 years.

If you realistically find that the lot is worth more, to be careful and conservative you might want to support a higher value of the land and hence lower depreciable basis for tax purposes (this is worse for you for tax savings purposes because you want the highest depreciable basis possible, but you also want it to be reasonable in case you get audited - and an auditor might see a problem with such a low land component - so support it!).

Again, you pick how much of the $300k is your depreciable basis (so only building portion) and it is an ESTIMATE so get good supporting documentation and come up with a realistic estimate. Get an insurance rebuilding estimate from your home insurance policy to help get a feel for the market value of the cost of the building in making your overall calculation/estimation/decision.

Does that make sense? Email back and/or we can discuss on phone if you want. Your calculation subtracting out the assessed value from the market value is not correct. As noted above, you use the percentages from the old assessment and apply them to the price YOU paid $300k for the property.
  • April 25 2011
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Professor Baron / Bob,

I am still not clear on the percentages as my tax notices show round numbers and not percentages.

To be specific, the home was purchased for $300,000.00 and the assessed value of the land is $890.00 and the assessed value of the improvement is $37680.00.

From reading the entries below would I utilize the following formula to determine the amount in which I can use as my reference for depreciation purposes:

Purchase Price - (Land Assessed Value + Improvement Assessed Value)

Therefore,

$300000 - ($890.00 + $37680.00) =
$300000 - $38570 = $261430
Total Amount For Depreciation Purposes = $261430

I am new to being an owner of rental property and there does not seem to be any clear and concise answers out there.  I am sure that I will have to submit an amended return for this as I did not do this correct in the portion of 2009 and for the entirety of 2010 when I was renting my home to another party.

Thank you for clarifying this.  Have a good night!

Regards,

Howard "Wazy"
  • April 24 2011
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Bob, in California the breakdown on property tax bills has nothing to do with the actual breakdown of value between land and building since we don't assess property that way under Prop 13.

Wazy - here's the end result. You sign your tax return so you need to be comfortable with how it is broken down. You are supposed to use the market value of each component land and building. So what is the market value? Property tax bills could be used as stated by Bob and might be realistic in states other than Calif....and in some states the assessor does this and you could use the ratio from the assessor and apply that percentage to your property.

You might also consider getting an insurance rebuilding quote to support the value of the building and leave the residual value (purchase price less insurance quote) as the value of the land. Just keep the supporting documentation that shows why it is reasonable the way that you broke it down. 

There is always the chance you will get audited and could have an issue, but depreciation (and depreciable basis) is an estimate made by the person signing their tax return....so good support should give you good protection.

Good luck!
  • April 24 2011
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In California, the local yearly tax bill gives a value to land and another to the improvements (buildings, etc.).  You can use the same % of land to improvements to apply to your house from it's selling price.
  • April 24 2011
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