IRS will WIN

[Possi]

My police client bought a condo as part of the "cop in the 'hood" program back in 2001.

He bought a new house in 2010 and got the LTHB credit.

He is renting the condo out and I'm setting up the depreciation schedule...

Cost plus upgrades= 45,634
Today's land value is = 34,900
Basis for Dep'n = 10,734

The assessment value today is
bldg 134,700
land + 34,900
total = 169,600

When he sells this property, he's going to make a killing, which is a "good and wonderful thing" as I say... but he will sure pay a lot of cap gains taxes on this baby.

Is there any advise you might give him regarding this property? (aside from CALL ME AFTER CLOSING AND BEFORE YOU SPEND THE WINDFALL??)

[BHoffman]

Is that an assessment value for property taxes? Often much higher than appraised value for obvious reasons.

[ChEAr$]

Advice? Yes.

He might consider selling the property before end of 2013 to achieve best capital gains tax rate.

[Nashville]

Land Value

If he would like to maximize depreciation, which
1) is a deduction against ordinary income, and
2) provides a ceiling rate for recapture

can you justify a lower value attributable to the land? Today's land value
is barely 25-30% of the total value, why would that not be the case in
2001? i.e. what is forcing you to use today's land value in the calculation
of depreciable value?

Have I missed a reg or court ruling?

[Possi]

land and selling

This condo is on the water, so the land value is high. There is a "unit" number to this condo, so I thought the land value would be minimal, but NO, not HERE. The assessed value is most likely lower than the FMV when it comes to water property in this area. I lived on the water until 4 years ago. It was an older house but it was on a private lake, and the land value was greater than the structure.

I did not know that I could use the land value in the year of purchase for depreciation. I could reduce it if that is the case.

I'll be sure to advise him to sell it by yr end 2013 IF he wants to avoid the hefty tax bill. That is what I was thinking, but you know me.... always wanting to bounce it off someone else for affirmation or correction (which is what I usually get...)

Thanks~

Just got the land value when he purchased it in 2002, it was $5900.

[taxea]

This condo is on the water, so the land value is high. There is a "unit" number to this condo, so I thought the land value would be minimal, but NO, not HERE. The assessed value is most likely lower than the FMV when it comes to water property in this area. I lived on the water until 4 years ago. It was an older house but it was on a private lake, and the land value was greater than the structure.

I did not know that I could use the land value in the year of purchase for depreciation. I could reduce it if that is the case.

I'll be sure to advise him to sell it by yr end 2013 IF he wants to avoid the hefty tax bill. That is what I was thinking, but you know me.... always wanting to bounce it off someone else for affirmation or correction (which is what I usually get...)

Thanks~

Just got the land value when he purchased it in 2002, it was $5900.

1. shouldn't the land value amount be the land value at the time of purchase?
2. my advise is sell before 2 out of last 5 years expires or move back in for 2 years (if time has expired) before selling. After all the longer he hangs on to it the better the likelihood that the value will go up.

[S T]

Basis Land to Bldg

Possi,

Wouldn't you use the cost basis at purchase date, and then percentage out the total purchase price and costs to Dwllg/Bldg and then to Land?

Not using "today's Land Value???

Then also add any additional improvement costs in the year completed since 2001

Sandy

[taxea]

Possi,

Wouldn't you use the cost basis at purchase date, and then percentage out the total purchase price and costs to Dwllg/Bldg and then to Land?

Not using "today's Land Value???

Then also add any additional improvement costs in the year completed since 2001

Sandy

I would take the original cost, subtract out the original land value, add improvements and use this as depreciable basis. I wouldn't % improvement but rather add dwelling improvements to the depreciable basis. Don't tink %ing would be appropriate if the only improvements made were made to the dwelling.

[S T]

Taxea Post

I believe that is what I was trying to convey

Original Purchase Cost needs to be split between Bldg and Land - not to use "current" land value.

Improvements after year of purchase would be then added to depreciation schedule separately by year according to the type of improvement - I said nothing about using percentages for improvements splitting between bldg and land.

I apoligize if I did not clearly state in my prior post.

Sandy

[Kram BergGold]

Depreciaiton

Since you know the building will be sold in 2 to 3 years and all depreciation will be unrecaptured 1250 gain there is very little to be gained from depreciaiton. I would use the original values to reduce depreciation and then think about electing the 40 year schedule rather than 27.5.

[Lion]

Depreciation

Isn't the value of the building for depreciation the lower of cost or FMV on the date put into service as a rental? So, "today" doesn't come into play. But, you need to know the "placed in service" date and values to compare with his adjusted cost basis.

[Possi]

Depreciation

Isn't the value of the building for depreciation the lower of cost or FMV on the date put into service as a rental? So, "today" doesn't come into play. But, you need to know the "placed in service" date and values to compare with his adjusted cost basis.

I am getting some confusing messages where depreciation is concerned. I thought depreciation was cut and dry, just like you said, Lion. Dep'n of the building is simply the lower of cost or FMV on the date put into service as a rental. If he does NOT sell it within 2 years of living in it, but sells it AFTER that window closes, the gains will be quite remarkable.

It seemed wrong though, to pit today's land value against his actual cost basis. That was how this started.

So, am I understanding that I would need to get a percent of land to building from purchase and keep that percentage when figuring the proper land value for depreciation? Then, add the improvements to the depreciation, AFTER the percentage has been figured?

Really, none of that makes logical sense. If the lower of FMV or actual cost is basis, and the lower IS actual cost, why not take the actual cost and the actual land value when it was purchased? Is that just too simple?

[Lion]

Lower

If the lower of FMV or adjusted cost on the date put into service works out to be the adjusted cost, then adjusted cost is what you use for depreciation. Of course, you can depreciate only the building and additions and not the land; and you would break out the land value -- in your case -- on the purchase date that corresponds to your adjusted cost. Today's land value doesn't figure in either scenerio for depreciation.

[Possi]

Well now. There you have it!

If the lower of FMV or adjusted cost on the date put into service works out to be the adjusted cost, then adjusted cost is what you use for depreciation. Of course, you can depreciate only the building and additions and not the land; and you would break out the land value -- in your case -- on the purchase date that corresponds to your adjusted cost. Today's land value doesn't figure in either scenerio for depreciation.

I know I have been accused of asking questions until I get the answer I want, and I will embrace that reality. I'm originally from SC and a whiner by nature. Not that all from SC are whiners, just confessing, that's all.

I learn so much more when I keep digging, and with testing around the corner, I have so much more to learn! Thanks, Lion, from one who hopes to keep it simple.

By the way, Lion, I will be in CT next week kicking off my season away from VA. Maybe we will meet! Email me at donnrae@gmail.com if you want! I still want to join the CT association.