Allocation of Property Proceeds

[equinecpa]

A real estate developer is negotiating with a client of mine to buy their farm. The developer's intention is to bulldoze the existing structures, and then put in residential housing.

If my client were to sell, what would be the correct way to allocate proceeds? Should it be allocated to the land only as this is what the developer is after? It makes a difference as there are structures that have accumulated depreciation of approximately $200,000 that would be subject to recapture if part of the sale proceeds were allocated to the barns.

Is this a case where my client should ask for a form 8594 allocating the price to the acreage?

[Burke]

Under Form 8594 for the sale of business assets, buildings and land are both Class V property. So that doesn't help you allocate between the two. A current appraisal would give you a better picture of how to allocate.

[Roland Slugg]

Adding to the above reply, the selling price should be allocated among all the assets sold in proportion to their relative FMVs. However, if the buyer wants only the land and plans to bulldoze all the buildings, a reasonable argument can be made that for this sale, the buildings have a collective value of $0. In fact, if the buildings weren't there, the buyer might pay more for the land because of the demolition costs he wouldn't have to incur.

If it were my client, I would consider allocating just enough to the buildings to yield no gain or loss on them.

[Burke]

An appraiser can use the "highest and best use" scenario to value the property, especially if he knows the circumstances involved regarding development and reason for purchase. I would hesitate to allocate this on my own without some kind of authoritative backup. The seller should pay for it. After all, how does he know he isn't being ripped off by the prospective buyer/developer? And is it properly zoned? Right now, it is probably agricultural. Could it be rezoned for commercial development which would bring a higher price? It's a small price to pay to have some definitive source of valuation.

[Davc]

Before, during, and after demolition pictures of the property.