Since land cannot be depreciated, you need to allocate the original purchase price between land and building. You can use the property tax assessor's value to compute a ratio of the value of the land to the building.
How should a taxpayer allocate the purchase price between land and building?
This results in the common query of how a taxpayer should allocate the purchase price between land and building. The Tax Court has repeatedly ruled that use of the tax assessor's value to compute a ratio of the value of the land to the building is an acceptable way to allocate the cost. For example, a taxpayer purchases a property for $1,000,000.
Using the tax assessor's allocation the taxpayer would allocate the purchase price $350,000 and $650,000 to land and building, respectively. Other acceptable methods used as basis for allocation include a qualified appraisal, insurance coverage on the structure (building), comparable sales of land and site coverage ratio.
Should a purchase price be allocated to land or property?
Allocating the purchase price to land rather than property can offer significant tax benefits, lower property taxes, simplify recordkeeping, enhance investment value, and provide greater flexibility for future use. It is essential to consult with a tax professional to determine the optimal allocation strategy for your specific situation.
How does property allocation affect financial and tax outcomes?
When acquiring real estate, the allocation of the purchase price between land and property can significantly impact financial and tax outcomes. It is common practice for a team on the buy-side of a real property purchase to push as much of the allocation price to the building and leaving as little possible of the allocation price to the land.
How can a land/building value allocation benefit your business?
The above example is a relatively small dollar amount for real estate, and the tax savings could easily be multiplied for larger, more valuable properties. By using the proper land/building value allocation, tax practitioners can continue to do their best for clients.
Should you calculate land and building values for tax purposes?
As featured in Accounting Today Calculating land and building values for tax purposes is a critical step toward maximizing your available tax deductions from depreciation. This is because the law says you can only depreciate items that wear down over time (i.e., the building and not the land).