question on rental property

Financial Planning Tax Strategies
1

I haven’t done this in years, so…

When creating the cost basis for the rental home, do you use the original cost plus improvements, etc. or do you start with the value of the home only, minus the land value based on tax records.

If the latter, do you also use that same proration when doing the expense for the property tax.

2

When creating the cost basis for the rental home, do you use the original cost plus improvements, etc. or do you start with the value of the home only, minus the land value based on tax records.

Land value is not depreciable. That said, neither of your options is totally correct, since you have to use the lesser of the market value at the time the property was placed into service (excluding land) or your basis in the property including improvements (again, excluding land). I would refer you to IRS Pub 527 https://www.irs.gov/pub/irs-pdf/p527.pdf It has a good example starting on page 15.

If the latter, do you also use that same proration when doing the expense for the property tax.

No, the total property taxes paid are expensed in the year you pay them. Just because the land is not depreciable doesn’t mean that property tax expense based on the value of the land isn’t an expense associated with the property.

AJ

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3

thank you

4

I’m going to add on to aj’s post a bit. Something that is rarely needed.

The cost basis of the rental property is the lesser of:

  1. The original purchase price plus improvements to the property since the purchase, or
  2. The FMV of the property when placed in service as a rental.

The basis for depreciation is the amount from above less the value of the land. Figuring that land value is an art, not a science. There are multiple ways to get there - the land value for property tax purposes is probably one of the least useful ways to determine the land value. It is highly dependent on your local assessor. In my area, it’s basically useless, as its just a formulaic calculation with little resemblance to reality. In other places, it can be pretty close to reality. You need to know which one is more applicable to your area before relying on the tax assessment. Yes, the IRS allows you to use it, but you need to make sure it makes sense for your specific property.

The full property tax bill is deductible as an expense of renting the property. (With a couple of exceptions, of course. There are always exceptions.)

–Peter

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