Pulaski

I don't remember the IRS form number, but filing for an extension is easy and needs no reason or justification, just be sure to get it sent to the IRS before 4/15.

Ms Moore

Good to know. will do. Thank you!

mmhendrie

We get the breakdown on land/building value in California also - but as I said, I looked at that, and didn't feel it was anywhere close to being an accurate number. At least out here, LA County never looks at your property. What does that mean? Well, it means significant improvements you might make, adding AC, replacing roofs, windows, adding heating, a patio, landscaping work, remodel the bathrooms, the kitchen - basically, anything other then increasing your sq footage - they don't know about. You could pump a couple of hundred thousand bucks in a year into improving your physical structure, and your next property tax statement isn't going to reflect a penny of that, nor the next one, or the next....I could invest a ton of money, transform my property, double its value as a structure, but that good ol' prop tax statement isn't going to reflect one bit of it.

If you're going to pour the time into it, you can work out what you think all the improvements you made impact the property value - but again, much of that is subjective. I could re-do a kitchen for $80k and say national averages show a return for investment of 65%, therefore I could argue my property structure increases $52k. I could run through all sorts of improvements I made over the 10yrs I owned the home prior to it becoming a rental, and adjust and depreciate the adjustments and end up with all kinds of wild numbers. Can I prove the costs of many of the improvements - I only made the decision to rent last year, and don't have anywhere near complete records - nor was I required to keep them, as it wasn't a business then. It all becomes terribly convoluted and subjective. The IRS are looking for something reasonable and justifiable, and I feel the method I'm using is is that - take a look at this, this company specializes in rentals, and they're one of the many I found advising the insurance method as an option: https://www.rentalutions.com/education/depreciation/

-Matt

Pulaski

If you're comfortable I'm not going to argue with you BUT if you put cash into an improvement you depreciate the CASH expenditure, and the COST of the building.

If you buy a $150,000 house of which $50,000 is land, you depreciate the $100,000 cost. Two years later, you improve the building with an extension costing $60,000, you now depreciate the $60,000 as well as the $100,000 cost, you do not go through some arbitrary process to ascribe a value to the improvement. It matters not one jot whether the $60,000 invested increased the value by $30,000 or $80,000, it is the $60,000 you spent that is relevant for tax purposes.

As I said earlier, taxes are calculated on a strict cash basis, once you have set the initial building-land split everything else is based on allowable cash expenditure and depreciation derived from capital expenditures.

mmhendrie

that's fair enough - but that only goes to highlight that the state provided property tax statement would be completely inaccurate for this purpose, should you have those types of cash output expenses directly depreciable. Over the course of my ownership, I've spent more improving my home then 100% of the stated property tax building assessment for my rental. Using the property tax number would be hugely inaccurate.

I am happy with my method. Based on my research, its a widely used method. It's not a silly number I'm plucking out of the air, I think it's a fair reflection of the building value and that it is reasonable to explain.

Pulaski

You only use that, adjusted if necessary, at the point of purchase, everything after that is based on cash expenditure. If you're doing anything else, good luck with your IRS audit!

MsElui

we rent our uk house (or did until we sold it a few months ago). we report it on the tax form as 50/50 land and building.

the figure is based on the last valuation we had for a remortgage.


does that help?


ps - the 'profit' we made after mortgage and expenses on the rental was below the uk tax threshold so we paid NO taxes in the uk - although it was all reported on our uk tax form. We reported the mortgage interest on the us form as well as rental income and expenses etc

mmhendrie

Anyhow...rounding back to the OPs question....

I have the latest version of Nolo's "every landlord's deduction guide". If you're not familiar, Nolo is a team of lawyers that produce a variety of 'self help' legal instructional books, updating most annually, and have been doing for over 40yrs. I've used them in the past for all sorts, most recently for probate, and I've never had bad advice from them. When it comes to establishing land & building value, here's what the experts say:

There Is No One Way to Determine
Land and Building Values
The IRS gives landlords virtually no guidance on how to go about
calculating the value of their land and buildings for depreciation purposes.
Its regulations simply provide that “In the case of the acquisition … of
a combination of depreciable and nondepreciable property for a lump
sum, as for example, buildings and land, the basis for depreciation cannot
exceed an amount which bears the same proportion to the lump sum as
the value of the depreciable property at the time of acquisition bears to the
value of the entire property at that time.” (IRS Reg. 1.167(a)-5.)
In other words, the basis of the nondepreciable land and the
depreciable buildings and other improvements must be allocated in
proportion to their relative values.

But how do you arrive at these relative
values?

There is no single method to determine how much any property
is worth, and the IRS does not require you to use any particular method.
Different methods can yield very different results. The methods you may
employ include using:

• your property tax bill
• the replacement cost of your building and improvements
• buyer–seller valuations, or
• comparable land sales.

You can try all these methods and use the best result, or average the
various results you obtain. Remember, your valuation doesn’t have to be
precise, it just has to be a reasonable ballpark figure.

****************
It obviously goes on into greater detail of each of the methods. I think the kindle version is $20 - it might be money well spent, I've found it very helpful.
thanks,
Matt

HartleyHare

We are in the same situation as the OP. The advice given to us by tax professionals in the UK and the US is an 80/20 split between building and land.

If the UK property was formally your main residence and has been converted to a rental property, you need to establish a "basis" value for depreciation. You will have to use the lesser figure from the following as your basis:

The original cost of the property (building) + fees + improvements OR
The current fair market value.

We bought our home 15 years ago and for obvious reasons would have preferred to use it's value now as our basis!

Here is a recent thread on the subject which you may find useful: http://britishexpats.com/forum/showthread.php?t=827226

Pulaski

You are correct, and all my previous posts in the thread should have added " .... or the market value at the time the property was first rented out if below cost."

Ms Moore

Thank you MsElui, for your response particularly as it relates specifically to my situation.

Pulaski and Yourself seem to have the same kind of split that was given by the UK surveyor I talked with (albeit informal). Of course having the back up was my main concern - that along with other concerns has made me realise I need CPA professional help with my return this year. Although having read all of the posts on this question, I am certainly more educated regarding rental than I was just a few days ago...it will be more helpful in subsequent year filings, if I choose to do it on my own.

However, thanks to everyone for taking the time to respond.

Cheers!

Ms Moore

Thank you HartleyHare, same as MsElui...appreciate your response as it relates specifically to my situation.

I mistook MsElui's 50/50 valuation split as being your 20/80 valuation, so apologies for that. I will be getting CPA to come up with the calculation. Since they should provide evidence where the figure came from.

The house was bought as a second home several years ago (hoping to semi retire/retire back home some time in the not too distant future) - and we have used it for personal use at various times, but we found keeping it vacant during winter was just too much trouble. And since we don't intend to use it again in the coming year we decided to rent it September last year. We have no intention of selling it.

After having read all of the IRS instructions, I am uncertain what our particular classification is, so this convinces me even more we need the advice of a qualified CPA.

But thank you to yourself and others for taking the time to post.

Cheers!