Land Allocation Suggestions
Transcripts from the video
Hi, this is Brian Kiczula with US Tax Advisors Group. Today I just wanted to talk about land allocations, and I was going to have Joe Viery cover the topic because this is one of the questions that we get asked on just about a daily basis from clients. They'll submit the information for the cost segregation study, but it's on a property they just purchased. And they're not sure how to carve out the land allocation. So, Joe, in this case, what would you recommend that they do in order to come up with a land allocation on a property?
Well, there is a brighter line as of a recent court case. When I say recent, it was about three years ago, and it was a building owner in LA., basically, the decision by the judge in the case was the IRS liked using the allocation from the county tax assessor. So if the county tax assessor, which you can find by pulling title or going online, it's at no cost. You can look up your county tax assessor, put in the address and you can get the allocation. If the allocation is 20% or less, you're done. I would just use whatever that amount comes in by the tax assessor and move on and deduct the allocation from the purchase price. And you have your building basis.
And typically when you're looking at the title report or the allocations that are online, it usually shows what the building allocation is. So really have to deduct it. So if it comes in at an 80% building or an approved value, you would be at the 20%. So really that's what we're looking at when we're looking at that report. Now, what happens if you see something that comes in higher? If it's 26%, well, 26% is still in the ballpark, but if it comes in at 50%? So you bought a property for $800,000, and now you're looking at a $400,000 land allocation based on this tax assessor's records, what would you do in that case?
Well, one thing everyone needs to know for sure is that US Tax Advisors Group incorporated, we're not land valuation experts. So we do not do this. We will give you assistance and we'll give you advice but you, meaning the property owner or their accountant, must come up with this allocation. So you want, of course, to have as much building as possible versus land, because that's how much depreciation you're going to get. So if it comes in wherever the property owner is questioning thinks it's a little bit too high, then there are a couple of other methods. One is if you had an appraisal on the property, look on the appraisal, but be warned because a lot of times the appraisal is for the building, the improvements only, and they don't put a value on the land. But it could be in the appraisal. So that's another option.
Typically on a residential appraisal, it'll be on the fifth page on the bottom right-hand side. It'll show a site value. And you can certainly look at that and compare it to the county's records. But what's critical when you're looking at doing land allocations is you have to remember what we're looking at a non-appreciable asset, the land, and you're carving that out against the purchase price. So you want to be as accurate or as correct as possible when you're looking at that land allocation. And I think Joe hit it on the head, we are not land appraisers. So it really is up to you as a property owner to carve that out. And we'll certainly provide any assistance that we can. If you have any other questions regarding land allocations feel free to reach out to us, schedule a time to talk to us, and we'll go over it in more detail.