How does TT determine land value? I entered $30k as the value of the land to determine the depreciable cost basis. Turbo Tax now says it's $30,279??

[ozzy032]

I'm looking for the calculation the TT does for determining the overall depreciable cost basis for a personal residence converted to a rental property. I entered purchase information, improvements costs, and land cost. TT now says my total is is MORE than the sum of all these things. How can this be?

[Carl]

" Why doesn't Turbo Tax just use the property assessed land value? That's what the IRS recommends. "

Assessed by whom? One thing the IRS does state, is that you do not use property tax values. You use the LESSER of what you paid for it, or it's FMV at the time it was placed in service. Generally, though not always, on rental or other business property, the lesser value will be what you paid for it.

TurboTax does use the property tax values to determine the ratio, and that's all. That's why the program asks for your property tax values. So if the property tax value is $100K for the whole thing, with the land valued at 30K, then the ratio is 30%. TurboTax then applies that percentage to what you paid for it, to determine the amount to allocate to the land. Now the IRS "does" recommend that.

[ozzy032]

Ok, so my original question was 4 months ago. I can't recall exactly what Turbo Tax was doing that was frustrating me, but I do remember that there didn't seem to be a clear way to determine how Turbo Tax was calculating the depreciable basis.

Carl, to your question about "whom": Assessed by the local Central Appraisal District for property tax purposes. Yes, obviously I can't use the property tax value as my depreciable basis. But when I buy a property, I can use the assessed value of the land as the land value for determining my depreciable basis (actual expenses less property appraised land value). But do I HAVE to use that ratio? Let's say I bought the property for $100K and the land value assessed was $30K (70/30). But then the next year I added a $10K kitchen upgrade. When I turn it into a rental the year after that, using the ratio method (which I believe Turbo Tax does), my depreciable basis is 70% of $110K or $77K. I don't know if this is wrong, but it seems like my depreciable basis ought to be my actual expenses: $70K for improvements when I bought it + $10K for the kitchen remodel which would be $80K. Improving the kitchen shouldn't increase the land value, just the improvements value. The way TT was doing it was reducing my allowable depreciation, and therefore causing me to pay more in taxes than I think I should have paid.

[Carl]

" But then the next year I added a $10K kitchen upgrade. "
That doesn't change the value of the land as you know. What you do is enter the $10K property improvement as a separate asset, which of course has no land value. That leaves the ratio for the originally purchased asset (rental property & land) at the same end values.
So you'd have two assets entered. The first asset would be the property/land itself which the program will show you an original purchase price of $100K with 30K allocated to the land using the 70/30 ratio in our example. The 2nd asset would be the $10K kitchen upgrade with a value of 30K overall and zero for the land.

[ozzy032]

So if I've owned a house for 20 years and made multiple improvements over that time, I have to separately depreciate them all when I decide to turn it into a rental?

[Carl]

Yes. Because you did not "acquire" the property improvements on the closing date when you purchased the property. You're also not "depreciating them separately". All assets have the same in service date, unless you did a property improvement after it was converted to a rental.. So they depreciate together. After entering all your assets separately, you'll see on line 18 of the SCH E one figure that is the total depreciation for the tax year of all assets for that property.

[TaxGuyBill]

No, you don't need to separately depreciate all "improvements" (remodeling, furnace, roof, etc.).  Those can be all lumped together because they were all part of the house when it was "placed in service".

However, you CAN (and should) separately depreciate non-building improvements, such as appliances.  You would usually use the Fair Market Value when you converted it to a rental.  Those are depreciated separately because they are depreciated differently than the building itself.


In answer to your question, NO, you don't "have" to use that ratio of building to land.  That is just a make shift provision.  You are right that using the current ratio (after making improvements) is likely to change the real number that should be used.

Assuming the valuation has increased since you bought the property, you should use the amount that you actually PAID for the land when you bought it.  Because that is rarely known, the using the ratio of building to land value when it was purchased is usually the easiest way to do it, but you can use any reasonable other method to come up with determining what you paid for the land.

[AnthonyC]

First, I will give you some general information about your question and then we will discuss one screen that may be causing your issue.

First, the adjusted basis of the property is calculated.  This general calculation used is the purchase price plus increases to basis (things like improvements and certain settlement costs) minus decreases to basis (certain depreciation and seller paid points) to arrive at adjusted basis.  

Next, to determine land basis, an allocated ratio is calculated between the assessed land value and the improved value of the whole property.  This ratio is then applied to the adjusted basis of the purchase price to arrive at the depreciable basis of both the land and improved value of the property.  

Generally, the land basis will be less than the amount you have entered.  While there are circumstances where it can be more, the one screen that may be causing a problem is the allocation between assessed land value and improved value (see screenshot below).  Make sure that you are using the entire value of the property when you input improvement value (i.e. that number should also include the land value).  If you don't use the full value, then you would likely get an unexpected result where the land basis is greater than the entered assessed value.

Example:  Assume your assessed land value is $50,000.  If the entire value of your property is $250,000, then the entries for land value should be $50,000 and the improved value should be $250,000 - NOT $50,000 for land value and $200,000 for improved value for a total value of $250,000.

Now, if the above scenario is not an issue, since there are quite a few inputs that can go into all of these numbers, it might be best for you to download a copy of your pdf of your return to get the full picture.  There will be several worksheets related to the rental property and basis calculations, but you should be able to see the calculation for land basis on the New Rental Property Worksheet.  This worksheet will lay out the calculation used by TurboTax for your return.

You can use the steps below to view your pdf before filing 

• Log into your account and click Take Me to My Return
• On the left hand side of your screen, you should see an option for Tax Tools and a drop down menu
• Select Print Center from the menu
• Click on Print, Save, or Preview this years return
• You will be prompted to pay for any TurboTax fees before you can print or view the pdf
• After paying, select the All Forms and Worksheets option for printing
• This will generate a pdf viewer that you can then view your entire tax return, including all the forms and worksheets

[ozzy032]

I think I figured it out. It appears the entire point of in the screenshot provided is just to determine the amount to be allocated toward the land value. Why doesn't Turbo Tax just use the property assessed land value? That's what the IRS recommends. But one main thing:

The answer given is incorrect.

For your example, it would be $50,000 for land, and then only $200,000 for the improvements. This equates to 20% land and 80% improvements. Turbo Tax then uses these percentages from the tax appraisal to allocate my actual costs (which were entered previously) between the land and the improvements. So in your example, if my costs previously added to $275,000, then Turbo Tax says the land is 20% x $275,000 which is $55,000 and the improvements are 80% x $275,000 which is $220,000. So only $220,000 is depreciable. This is very unclear, and I was only able to figure it out by trial an error. The thing is, I can't find anywhere in the IRS guidelines or instructions that recommends this method for allocating my costs. IRS just says use the $50,000, and depreciate the $225,000. The result from using the land/value ratio happens to increase the land value and decrease the allowable depreciation works is not in my favor. Although, if my costs are LESS than the assessed values, then this method would work in the taxpayers favor. Either way, I can't find any IRS guidelines that say to do it that way.

Turbo Tax should just calculate the allowable depreciation by subtracting the land value from actual costs...simple enough.

[Rocco1231]

Hi All - 

I'd like to revive this topic from a few years ago in hopes that you can help me figure out if I'm doing the depreciation part of my rental property accurately.  Below are the basics:

Purchased on 5/28/21 for $125,000

Per the tax record for right around that date, the property had an assessed value of $105,100.  $75,100 was for the improvement and $30,000 was for the land.  I know these two amounts are only used to give me a land/improvement ratio.

I had $2,150 in eligible closing costs to add to the basis and I spent $10,739 in capital improvements before the rental was put in service on 8/26/2021.  The adjusted basis is $137,889.

This is what I thought the calculation should should look like:

$30,000 Land Value  / $105,100 Total Value = 28.54424%

$125,000 Purchase Price x 28.54424% = $35,680.30 Land Value Based on PP

$125,000 PP + $12,889 in Adjs - $35,680.30 Land Value = $102,208 Depreciation Start Value, which when multiplied by the August partial year percentage of 1.364% you get an appreciation amount of $1,394.

This is what TurboTax is actually doing:

$30,000 Land Value  / $105,100 Total Value = 28.54424%

$137,889 Adjusted Basis x 28.54424% = $39,359 Land Value Based on Adjusted Basis

$137,889 Adjusted Basis - $39,359 Land Value = $98,530 Depreciation Start Value, which when multiplied by the August partial year percentage of 1.364% you get a depreciation amount of $1,344.

I know I'm splitting hairs when the final depreciation amounts aren't that far off, but which way is the correct way?  Should the Land Value be calculated using the Adjusted Basis or the actual Purchase Price?

Any help you can give would be greatly appreciated!

[ColeenD3]

Yes, you are correct that the land is 28.5% and that out of the $125,000 purchase price, 28.5% of that is allocated towards the land.

The $2,150 settlement charges are also prorated in the same way.

However, the $10,739 for the improvement is solely added to the home. Your basis for depreciation is 71.5% of the house cost and closing costs plus the amount of the improvement.

This is what TurboTax is actually doing:

$30,000 Land Value  / $105,100 Total Value = 28.54424%.

Your total value is cost, plus closing costs plus addition.