Rental valuation problem

[Margaret CPA in OH]

Client relocated to another state and couldn't sell condo. He paid $175,000 in 2007. It was pulled from the market when it didn't sell at $120,000. Recent comp within the year in the building for similar unit but updated kitchen was $125,000. Property tax listing is $150,000.

It was leased in November but what would be the depreciable value? I know it's lower of purchase or fmv but what is fmv when it didn't sell at $120,000?

[Pacun]

Client relocated to another state and couldn't sell condo. He paid $175,000 in 2007. It was pulled from the market when it didn't sell at $120,000. Recent comp within the year in the building for similar unit but updated kitchen was $125,000. Property tax listing is $150,000.

It was leased in November but what would be the depreciable value? I know it's lower of purchase or fmv but what is fmv when it didn't sell at $120,000?

I would use $150,000 since you have documentation to that effect. The FMV is not real when there is not a person willing and able to buy. This is a matter of time and matter of decision. Maybe if he left the property on the market it would be sold but he didn't have time to wait. The fact that the government is taking a position that the FMV of the ocndo is $150K and the owner is paying taxes on that amount will give enough grounds to hold your position.

[Margaret CPA in OH]

Thanks, Pacun. My inclination was actually to use $125,000, sort of splitting the difference between the tax valuation and the no sale asking price. With the comp sale within the year of $125,000, I also thought that might be substantiation. What a mess! And who knows what the ultimate sale price will be if/when he does sell? At least I don't have to try to split out land! And the depreciation amounts won't be that much different, either. I just wanted some other opinions.

[Terry D EA]

Hi Margaret, this is a tough one. Did you client by chance have the property appraised when it initially went on the market? If so, then I would use that figure for the basis of depreciation. I wouldn't lower the depreciable basis becuase the property didn't sell. That fact that the market did not return a sale isn't enough reason in my opinion to reduce the depreciable basis. The appraisal would be the best form of substantiation. However, if there is not an appraisal, then I have to go with Pacun on this one and use the tax card value.

[Margaret CPA in OH]

I didn't ask but am fairly certain an appraisal was not done. I imagine that the realtor priced it at what he thought it would sell for. The client said it was pulled from the market when it didn't generate a single inquiry at $120,000. My guess is that he owes at least that much and couldn't afford to pay the difference. Okay, tax valuation is the figure, then. I just truly doubt that it will sell any time soon for that amount. So many people are in this unfortunate situation, too. So sad...

[jainen]

>>what is fmv when it didn't sell <<

Sale price is only one of several methodologies for real estate appraisal. Business property is often valued by its income stream. Call the leasing agent and ask what gross rent multiplier or cap rate was used in arriving at the payment amount.