Sale of mixed use property, help with allocating sales price

[kamckinley]

Hi Everyone. I'm really struggling with a mixed-use property sale, I'm hoping to get some insight on some of my questions.

In general, client sold their home last year, they had a separate barn on the property that was personal use for most of the time they lived there, but they rented it out for a few years before they sold their home.

I think I'm okay with the cost basis part, they had the barn converted to a livable structure and have good records, so I'm comfortable with the $15,000 they gave me.

It's the sales price I'm struggling with. How do you allocate the sales price between the house (which was their personal residence and qualifies for the home sale exclusion) and the barn?

The house sold for $279,900, which includes a 3,000+ sq ft house, 20 acres and 3 outbuildings including the livable barn that was rented out. The livable square footage in the barn is pretty small, around 300 sq ft.

The property was appraised at $350,000 before they sold (not sure how good that appraisal was since they weren't able to sell anywhere close to that price). They sold the property for $279,900. They do not have a separate appraisal for the barn that was rented out.

Anyway, what would be a reasonable way to allocate the sales price? I have the cost of the barn (15K) vs the cost to build the house ($165K). Would it be reasonable to assign 8.3% of the sales price to the barn (based on the proprotion of the cost to build the barn vs the cost to build the house)? Or should you allocate based on square footage, which would be slightly lower (250 sq ft for the barn vs 3100 for the main house)?

I can't imagine that the barn had very much value compared to the 3100 sq ft house and the 20 acres of land. But again, I'm not sure how much of the sales price to allocate to the barn.

Or, do they just need to recapture the depreciation for the years the barn was rented?

Any help would be greatly appreciated, thank you!

[Anarchrist]

Does the appraisal have any sort of break down?

Is there one property tax assessment for the whole property or separate ones for the barn & land?

Were the house & barn built close to the same time?

What was the cost of the land? Is it included in the $165k cost of the house?

Is the $279,900 gross sales price or after commission and selling costs?

If the barn is 250 sq ft and the house is 3100, the barn cost $60/sq ft to build ($15,000/250) and the house cost $53/sq ft to build ($165,000/3100).

What difference does it make on their tax return? If you allocate on cost, then the sale price of the barn is $23,325 (8.3333% of $279,900) for a $8,325 gain. If you allocate on sq ft, then the sale price of the barn is $20,888 (7.4627% of $279,900) for a $5,888 gain. A difference of $2,437. At a capital gain rate of 20%, 15%, & 0%, that's a difference of $487, $366, & $0 in tax. At those amounts, it's not worth spending a ton of time on.

[kamckinley]

Thanks Anarchrist. I don't have answers to all of your questions (working on it, I had a similar list that I emailed the client this morning). However, you made me realize I forgot to include the cost of the land when allocating the sales price, that will help!

[Lion]

I'd probably look at the assessor's breakdown after the barn had a certificate of occupancy and use that ratio. As KA said, it's not going to make a lot of difference vs. your hourly rate.