If you need to know how to determine the value of your purchased land, this is a great way to understand the process.
Trying to determine land value when you purchase real estate is a crucial step mandated by the IRS. The purpose of this step is fundamental to real estate tax accounting: the land value must be subtracted from your total purchase price to establish the depreciable basis for your building. This results in two separate assets: the building, which is a depreciable asset (allowing you to take tax deductions over its useful life), and the land, which is not depreciable. Since the land is not subject to depreciation, accurately allocating the purchase price between these two assets is essential for maximizing your tax savings.
While this video cannot determine the specific values for you, your accountant is an excellent resource to help you through this process. The most defensible and preferred method for determining land value is to first collaborate with your accountant to review the property's original appraisal document. The appraisal often contains a specific, listed land value that the IRS is generally inclined to accept. If, however, the appraisal does not provide a usable land value, the next best defensible source is your property's tax card, which can be typically found on your County Assessor's website. The tax card provides a ratio of the land value to the total assessed property value, which can then be applied to your actual purchase price.
For example, consider a client who purchased a property for $1.5 million. The client located their tax card, which showed an assessed land value of $275,000 and a total assessed value of $1.1 million. Applying this 25% ratio to the client's $1.5 million purchase price yields a defensible land value of $375,000. The remaining amount, $1,125,000, is then assigned as the depreciable basis for the building asset. Having a clear and defensible land value determined through this process prepares you for the next steps with Engineered Tax Services (ETS) and helps ensure your cost segregation study is accurate and maximizes your benefits.
Key Steps for Determining Land Value:
- IRS Requirement: The IRS mandates that you determine and subtract the land value from the purchase price to establish the depreciable building basis.
- Depreciable vs. Non-Depreciable: The building is a depreciable asset, while the land is a non-depreciable asset for tax purposes.
- Best Source (Appraisal): Work with your CPA to check the property's appraisal, which often lists a defensible land value.
- Secondary Source (Tax Card): If the appraisal is unavailable, use the property's tax card from the County Assessor's office.
- Tax Card Ratio Method: Calculate the ratio of the assessed land value to the total assessed value on the tax card, and then apply that percentage to your purchase price.
- Building Basis Calculation: The remaining amount after subtracting the determined land value from the purchase price becomes the depreciable basis for the building.
