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Splitting Land & Building values for rental property

Splitting Land & Building values for rental property

Old Apr 2nd 2014, 4:58 pm
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Default Splitting Land & Building values for rental property

Hello,

hello to everyone!!, glad I found you, what a great resourse!

I have just discovered the BE site whilst trying to find out how I should value the land portion of my UK rental property (for the purposes of splitting Land/Building for depreciation)

Unfortunately all calls to the UK - Surveyors, HMRC, Valuation Office - have not been fruitless with this particular enquiry - I can't seem to find any published statistics or public access reports on this.

I am assuming there are other EXpats who have rental property to report to the IRS, unfortunately trying at this late stage to get information from US/UK CPA's is proving difficult to.

Any help or pointers would be much appreciated.

Thank you
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Old Apr 2nd 2014, 5:32 pm
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Default Re: Splitting Land & Building values for rental property

The last advice I recall seeing was that the split should be "reasonable", and agreed in consultation with your tax advisor. Clearly in the absence of official records in the UK that document the land v buildings spilt, the split is going to be no more than an educated guess, unless there happens to be a vacant plot nearby for sale, which I would say is extremely unlikely in the UK.

FWIW I would guess that land would be about 20% of the purchase price, or that would be my opening figure, subject to any factors that might push the number up or down. Unless the land is in Knightsbridge, or the building is a shack, I can't see the land being more than 30% of the purchase price. ..... But the greater the proportion attributed to the building, the greater your depreciation and therefore the lower the tax, so I doubt land would be less than, say, 10% of the purchase price ..... go too low (on the land value) and you might attract the attention of the IRS auditors.

BTW be sure to claim all your allowable expenses: mortgage interest (only, not principal), repairs, management fees, insurance, depreciation on appliances (white goods-> 5 yrs) and furniture, deprecation on capital expenditures (if any), property taxes (if any). ..... And it is quite possible for US tax purposes to have a zero taxable profit even if you have a healthy positive cash flow.

Last edited by Pulaski; Apr 2nd 2014 at 5:36 pm.
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Old Apr 2nd 2014, 6:18 pm
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Default Re: Splitting Land & Building values for rental property

This is out of my bailwick of legal knowledge. However, the idea of depreciation is partly to allow accumulation of replacement cost. So, what are construction costs per square foot if the property is destroyed tomorrow. I know that insurance policy coverage is computed that way. [BTW, thinking in L.A. terms, the percentages given by Pulaski strike me as absurdly low.]
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Old Apr 2nd 2014, 6:49 pm
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Default Re: Splitting Land & Building values for rental property

Originally Posted by S Folinsky View Post
This is out of my bailwick of legal knowledge. However, the idea of depreciation is partly to allow accumulation of replacement cost. So, what are construction costs per square foot if the property is destroyed tomorrow. I know that insurance policy coverage is computed that way. [BTW, thinking in L.A. terms, the percentages given by Pulaski strike me as absurdly low.]
Not the replacement cost but the original value when purchased or converted to rental property. It will usually be much lower than the replacement cost.

You can't go by what makes logical sense because then you shouldn't be able to depreciate property that increases in value. Replacement cost has to do with insurance and not taxes.

Last edited by Michael; Apr 2nd 2014 at 6:54 pm.
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Old Apr 2nd 2014, 7:00 pm
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Default Re: Splitting Land & Building values for rental property

Originally Posted by S Folinsky View Post
This is out of my bailwick of legal knowledge. However, the idea of depreciation is partly to allow accumulation of replacement cost. So, what are construction costs per square foot if the property is destroyed tomorrow. I know that insurance policy coverage is computed that way. [BTW, thinking in L.A. terms, the percentages given by Pulaski strike me as absurdly low.]
Round here on the edges of the 'burbs, builders will buy raw land for $10,000/acre, subdivide it into 2-5 lots, and sell houses for $150,000-$300,000 with an ascribed land value of $10,000-$30,000 per LOT. Fancier developments closer to town can double or even triple those numbers. My house has land under it of about 12% of the assessed tax value of house+land.

In the UK the numbers are completely out of whack compared to most of the US. I sold my 700 sqft row house in London more than a decade ago for almost $400,000 (out of which I had to redeem my mortgage ), and later some similar, but renovated, houses, in the same development went for $600,000.

Last edited by Pulaski; Apr 2nd 2014 at 7:12 pm.
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Old Apr 2nd 2014, 7:07 pm
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Default Re: Splitting Land & Building values for rental property

Pulaski,

I am new to the forum (today my first ever posting on a forum).

I did respond/reply to your first post but don't see it, what may I have done wrong?
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Old Apr 2nd 2014, 7:11 pm
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Default Re: Splitting Land & Building values for rental property

Originally Posted by Ms Moore View Post
Pulaski,

I am new to the forum (today my first ever posting on a forum).

I did respond/reply to your first post but don't see it, what may I have done wrong?
I don't know. BE is only showing two posts for you, so I fear it it likely lost, unless you can find it using the "back" button on your browser. BE has no way of capturing "draft" posts.
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Old Apr 2nd 2014, 7:18 pm
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Default Re: Splitting Land & Building values for rental property

Originally Posted by Ms Moore View Post
Pulaski,

I am new to the forum (today my first ever posting on a forum).

I did respond/reply to your first post but don't see it, what may I have done wrong?
If you posted a link, the post goes into "never land" during your first 3-5 posts (actually it goes to a moderator and won't be posted until they get around to it). This stops spammers from posting links and hopefully they are banned before they get to 3-5 posts.
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Old Apr 2nd 2014, 7:29 pm
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Default Re: Splitting Land & Building values for rental property

Originally Posted by Michael View Post
If you posted a link, the post goes into "never land" during your first 3-5 posts (actually it goes to a moderator and won't be posted until they get around to it). This stops spammers from posting links and hopefully they are banned before they get to 3-5 posts.
Ah, I forgot. . That might explain it.
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Old Apr 2nd 2014, 7:36 pm
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Default Re: Splitting Land & Building values for rental property

I've done a fair amount of reading on this over the past few months, as I'm now a landlord - my rental is here in the US though.

As very best as I can establish, the IRS has no rules for how you come up with your building vs. land value break down. They had some suggestions; property tax statements, insurance rebuild values, etc. but nothing concrete - what I read is that it needs to be justifiable - essentially, if it seems reasonable, you're good. They don't ask for your calculations, just the final value, and if they audit you, be prepared to be able to show them something that seems 'reasonable'.

looked at my property tax statement and found that woefully inadequate. I then took a look at my insurance policy at the structure cost, and found that to be much more in line with what I'd expect. A friend of mine who's an insurance adjuster tells me most homes are underinsured 10-15%, and that most policies will 'cover themselves' by having an endorsement to allow an extra 10%-20% in building costs to cover under insurance, or new building code requirements etc. So, I'm going with my insurance re-build value +10%. It took me a while to get comfortable with it - personally, I like hard and fast rules, but I really did a pretty solid look around, and can't find any. I suppose you could ask 4 different contractors how much to rebuild your house and I'd bet you'd get wildly different numbers - so I think this is the IRS saying 'we know this isn't an exact science, just don't run amuck'. Insurance value is suggested as a possible, it seems a reasonable number to me in my instance, and I feel I'd have no problem explaining it to the IRS should I ever need to. So that's what I'm doing...

-Matt
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Old Apr 2nd 2014, 7:38 pm
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Default Re: Splitting Land & Building values for rental property

Pulaski,

Ok it must be lost but here goes...

Thanks for your response it certsainly gave me more to think about. Specifically:

1) I don't have a tax advisor - and I am finding it is a bit too late to engage a qualified US/UK tax specialist at this time of year. Apart from this rental reporting my 1040 is very straight forward.

2) I can't rely on mortgage interest as an expense - (excepting the usual repairs and insurance etc) depreciation will be my only offset to income - so am keen to get the depreciation calculation right. I think using the conservative (30%) land value will hopefully keep me right. Although it may expose me to some amount of income tax liability (not this partial year renting) but going forward.

Thanks for your response, in your opinion would you suggest that a tax advisor is absolutely necessary in this kind of situation. I don't want to be in trouble with the IRS, but I want to get as much depreciation offset as I am entitled to. I don't plan to sell the property and I realize it is a 1/40th depreciation offset, but I don't necessarily want to make a taxable profit every year.
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Old Apr 2nd 2014, 7:43 pm
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Default Re: Splitting Land & Building values for rental property

Originally Posted by mmhendrie View Post
..... Insurance value is suggested as a possible, it seems a reasonable number to me in my instance, and I feel I'd have no problem explaining it to the IRS should I ever need to. So that's what I'm doing. ...
If you ever need to, the response of the IRS to your explanation is going to be very interesting, because you can only depreciate on COST. The insurance value of rebuilding the structure has no bearing on the cost basis of depreciation.

The county deed and/or tax records should show the land and building split. They do in NC and annecdotally I hear that is usual in most states.
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Old Apr 2nd 2014, 7:48 pm
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Default Re: Splitting Land & Building values for rental property

Originally Posted by Ms Moore View Post
Pulaski,

Ok it must be lost but here goes...

Thanks for your response it certsainly gave me more to think about. Specifically:

1) I don't have a tax advisor - and I am finding it is a bit too late to engage a qualified US/UK tax specialist at this time of year. Apart from this rental reporting my 1040 is very straight forward.

2) I can't rely on mortgage interest as an expense - (excepting the usual repairs and insurance etc) depreciation will be my only offset to income - so am keen to get the depreciation calculation right. I think using the conservative (30%) land value will hopefully keep me right. Although it may expose me to some amount of income tax liability (not this partial year renting) but going forward. Personally, I would not file a tax return with an investment property included without using an experienced CPA.

Thanks for your response, in your opinion would you suggest that a tax advisor is absolutely necessary in this kind of situation. I don't want to be in trouble with the IRS, but I want to get as much depreciation offset as I am entitled to. I don't plan to sell the property and I realize it is a 1/40th depreciation offset, but I don't necessarily want to make a taxable profit every year.
1) File for an extension to give you more (up to six months) to file your taxes, though there is a small penalty to pay if you're late paying any amount due.

2) I don't understand "can't rely on interest", interest is a deduction, assuming the property is mortgaged, and it is typically large compared to the rent. If you have interest you really must include it in your tax computation , ..... or are you just saying you own the property out right?
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Old Apr 2nd 2014, 7:50 pm
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Default Re: Splitting Land & Building values for rental property

mmhendrie,

Appreciate your response.

My rental property (house and garden on residential street) is in the UK and it appears there is no way to determine the split of land/building values - like they do here on property assessments.

The only response I got from enquiries to various UK professionals seems to tie in with what Pulaski was guessing (i.e 20-80 or 30-70 split), but of course they would not furnish me with anything concrete to back this up. So it does concern me more than a little in case if I am ever asked by the IRS how I came to my calculation. But I am going to be extremely conservative and opt for 30% Land and 70% building.
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Old Apr 2nd 2014, 7:58 pm
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Default Re: Splitting Land & Building values for rental property

Pulaski,

Yes! we own the property, it was our home prior to moving to the US and we plan to keep our UK property for retirement years. We only decided to rent it as keeping it secure and safe during winter in the UK is not a good option for us.

We never really intended making it a business, but it seems for our particular circumstances it is the only option we have for reporting purposes. Not having mortgage interest means that we will likely have some kind of gain in future years so we couldn't go the "Not - for - profit" route.

I didn't really know you could get an extension - I thought you had to have good reason. We probably won't owe Taxes, we always end up with a rebate. But I will look in to extending.

Thanks
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