Rental Property Land Value

[Terry D EA]

What do any of you use for land evaluation of rental property for depreciation purposes. I normally get a HUD handed to me that shows the total sale and have to put in a few hours to find the land value. Just wondering? Also, I have had this happen, the land value is more than what the purchase price is for the building and the land.

 

[Catherine]

I usually use the property tax bill (supposed to be on all bills, hollow laugh) or property card record from the online assessor's database (almost always has the info).  If I still can't find it, I call the town assessor's office.  They have all the splits between land and building values.  

[Max W]

For years, there was an 80/20 rule that was a good approximation for most of the country.   That was when RE prices grew at a rate of 1% above the rate of inflation. However, beginning in the 1980's with land conservancy trusts, which took a lot of buildable land off the market. the added expense of environmental impast studies, and then the easy financing policies from the 90's on,   price growth became skewed particularly in the East and West coastal areas.   On the one hand there were actions decreasing supply and increasing costs and financial and lending policies increasing demand.   

Now, it is not possible to make estimates of the Building/Land ratios because they are all over the place.  So, now, as Catherine suggests, it is best to use property tax statements to get the right ratio.  

A good example of both methods is found in a return I prepared recently.  The client had lived on the East Coast and was transferred to SF, in 2015, where he bought a rental property.   He had his usual preparer in CT prepare the 2015 return and this preparer used the 80/20 rule.   However, his property tax statement for 2016 was nearly the reverse of this.  It was 30% Building and 70% Land.  

There is an interesting interactive chart that shows the relative price changes, from 1980 to 2016, for 3 US cities.  You can have a little fun with this clicking on the other cities to the right of the chart .   The east and west coast cities showed the largest bubbles; mid-western cities not so much, but Pittsburgh was a straight line, meaning it was barely affected by the housing chaos.

https://www.economist.com/blogs/graphicdetail/2016/08/daily-chart-20

 

[RitaB]

I also look up the property tax assessment. If the land is say 15% of the tax assessor’s total, I assign 15% of the number you’re working with to land. 

[Roberts]

There is a very convoluted equation I go through where I ask the client if they would rather take more depreciation or less and how long they plan on owning the rental property. I decide between 10% and 70% of the value. Then I ask "does it seem reasonable the land itself might be worth $X?", they say yes and we roll with it.

My county tax doc says the land under my house is worth 10% of the value assessed. In reality the land is worth about 70% of the value of my home. For my co-worker the land was worth more than the value of the home as the buyers had to spend $20k to demolish it so they could build a mansion on the lot.

[RitaB]

2 hours ago, Roberts said:

... I ask the client if they would rather take more depreciation or less and how long they plan on owning the rental property. I decide between 10% and 70% of the value. Then I ask "does it seem reasonable the land itself might be worth $X?", they say yes and we roll with it.

Respectfully, this seems as unreasonable to me as your assessor’s errors do to you. What the taxpayer wants to do and how long he’s going to own a property mean zero. I get what you’re saying, and IRS is oblivious, but ok I am shutting up now. Respectfully.     

Friends 4 Ever. 

[RitaB]

1 hour ago, RitaB said:

Respectfully, this seems as unreasonable to me as your assessor’s errors do to you. 

I just realized this was probably the point you were making. Sorry.

Daylight Wasting Time - 2.   Rita - O

[Roberts]

15 hours ago, RitaB said:

I just realized this was probably the point you were making. Sorry.

Daylight Wasting Time - 2.   Rita - O

Yep. I don't think there is a blanket answer that is more right or more wrong so I prefer to fit it to the client's situation and make them happy.

Max said it very clearly, there just isn't a one true answer that is unquestionably correct and all other figures are wrong.

[RitaB]

1 hour ago, Roberts said:

Yep. I don't think there is a blanket answer that is more right or more wrong so I prefer to fit it to the client's situation and make them happy.

Max said it very clearly, there just isn't a one true answer that is unquestionably correct and all other figures are wrong.

Still, there are better ways than others.  I don't believe making the client happy can be the rationale in assigning values for real estate (or anything).  It's one thing to play around with Section 179 or bonus depreciation with equipment.  That's allowed.  But you can't divvy up a tractor and loader sold together and assign values to each one at will.  There is an actual price in there for each one, and if you don't know it,  you've got to try to be as accurate as you can.  You've got to use some logical method to assign value to the land with rental property.  And again, respectfully, I'd never use your method.  Friends 4 Ever nonetheless. 

[Roberts]

This thread is specifically about rental property and the basis of land for depreciation. How did it become about a tractor?

My rental property method is fully justified by what Max wrote.

[Medlin Software, Dennis]

Not that it matters, but this made me look at my tax bill again.  CA, Prop 13, bought in 1994.  Probably will rent it out in a few years.

My Land figure is currently .45 of the gross taxable.

 

[RitaB]

1 hour ago, Roberts said:

This thread is specifically about rental property and the basis of land for depreciation. How did it become about a tractor?

My rental property method is fully justified by what Max wrote.

It's always about a tractor for me.  How is we've been friends all this time (4 Ever), and you don't know this?

Max said it's best to use the property tax assessments to get the proper ratio.  Your mileage may vary with your assessor and Medlin's. 

 

[Medlin Software, Dennis]

This issue will become common - unfortunately - for many near us.  Those that had fire damage will be getting revised tax bills.  Gripes me the local news keeps talking about a zero amount, when the truth is the zero amount will only apply to the improvements lost.  Those not aware will get more pain, when they see their tax bill only cut in roughly half, as their land is probably more valuable or close to the improvements (like mine).  Thankfully our assessor is good, and will no doubt correct the bad information before the bills are revised.

[David W Ristau CPA]

Here in Hawaii land values have far exceeded building values for several years on most older properties. I access the assessor's land values AND contact local realtors for comparable selling prices of vacant land. Most times between the two sources a reasonable allocation can be made, and reminder, a reasonable allocation is what's required in lieu of absolutes as far as income tax return filings. When land values exceed the combined purchase price of land and building, I research for a comparable building value and use a ratio to allocate value to building and land. Due diligence and clear workpaper on how the numbers were derived are essential.

[SaraEA]

Be careful about guessing at land/improvement ratios.  In the line-by-line audit our client is undergoing (yes, still ongoing--auditor opened up another year and thought up new questions), auditor wants verification of those numbers.  She actually looked up the assessor data online and found that the sq footage of the house is different than what we've used for over a decade.  We just used what the client told us back then (didn't have access to online data in those days). The difference is a small percent, times the home office expenses will change the tax bill by under $50.  I think we could argue this is de minimus in a regular audit but in the National Research Program audits every single thing has to be proved.  It seems we used the 80/20 rule for land value, again not having easy online access back then, and that is also being questioned because the assessor card shows the land and house are more like 50/50.

Maybe someone can help with this one: The client takes people on fishing trips--a legitimate business, licensed, separate checking account, pretty good logs and records.  Auditor wants to know how much of boating time is "personal use," to correctly apportion expenses.  That's a legitimate question with a car and can be calculated.  But boats don't have odometers or have time books like truckers unless they're really big boats I guess.  I'd like to argue that there is zero personal use but not sure that will fly (it won't with autos). So how do we give the auditor something mathematical to determine business vs personal use?

[Terry D EA]

Thanks for all the replies. Don't know this for sure but don't most boats have an hour meter? If so, the of course, the question is how to determine business verses personal use hours.

[Lynn EA USTCP in Louisiana]

Boats have hour meters. The client should have kept a usage log, with details of the paid trips versus nonpaid personal trips, including hours for each