Wife and I are moving in a few months and wanted to rent our home (or at least seriously consider it) before we make the 2 year decision (or 3) to avoid capital gains.

As I understand it, we can depreciate the value of the home, but the cost-basis is determined by OUR purchase price vs land appraisal?

So here is what I don't get: the only appraisal I know of is what Austin determines on our taxes. Our 1050 ft 2 bed 1 bath has a:

$425,000 land valuation
$110,000 home valuation

This would me we can only depreciate a home value of $110,000 over 27.5 years?

But if it were sold today for say... $800,000 (Central Austin), then it would be $800,000 - $425,000 = $375,000, or $13,612 depreciated every year?

Talk to your CPA. The CAD valuation likely doesn't come into play at all here and I assume that's where you're pulling those values from.

That's correct.


To be honest though, I may have a tough time either way: people and builders are buying older/unkept houses for $750,000 in my area and tearing them down.


Not sure how we can go back and retroactively re-assess based on 2018 independent appraisal. I'll ask.

Assets are egenerally depreciated at historical cost, not market value. Talk to your CPA. There are some factors that may affect your basis for depreciating.

Looks like the IRS suggests using county appraisal values to get % land value.

https://www.irs.gov/pub/irs-regs/depreciation_faqs_v2.pdf

Diggity said:

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Looks like the IRS suggests using county appraisal values to get % land value.

https://www.irs.gov/pub/irs-regs/depreciation_faqs_v2.pdf

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It's what I do to determine the allocation between building and land for my clients.

I always thought cost segregation studies were the best avenue.

Worrying about how much you can depreciate may be a futile exercise since you'll be recapturing it when you sell no matter what. I would just document how you split your basis (percentage of purchase price equal to county appraisal percentages is probably fine) and move on.

evan_aggie said:

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That's correct.


To be honest though, I may have a tough time either way: people and builders are buying older/unkept houses for $750,000 in my area and tearing them down.


Not sure how we can go back and retroactively re-assess based on 2018 independent appraisal. I'll ask.

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You're depreciating the asset that you purchased. Talk to a CPA, but the depreciation should be based on your investment in the asset, not what it is worth at a time of your choosing. There's no transfer of ownership happening when you start to rent it, so how could there be a basis change?

I'm not disagreeing.

I'm just wondering if anyone has ever encountered a case where city claims your property assessment is 80% land value.

I'm sure some clever people here don't take it laying down when it doesn't seem to make sense.

Are you looking at historical value split or current?

OldArmyBrent said:

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Are you looking at historical value split or current?

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Honestly, this may be a futile inquiry. Even historical % home vs % land has been around 25-30% valuation. Oh well..

Quote:

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I'm just wondering if anyone has ever encountered a case where city claims your property assessment is 80% land value.

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Sure, it can happen easily enough. This is the way my house is assessed currently.

If you're seeing tear downs in the neighborhood that is a good indicator that this is going on.

Again - you're looking at recapture in the future anyway, but the IRS has a few acceptable methods. When we do cost seg studies for a transaction that happened in a prior tax year, we typically strip out all the additions and enhancements (those get added back at the end as depreciable) and use an approach based on average cost to build what is there and apply that percentage split (land and 39/27.5/15/7/5 year property) to the purchase price. This can get you a marginally better result than the split that the appraisal district has.

Your basis is what you paid plus all capital improvements/ugrades, minus the percent attributable to land value. Note that if you were to somehow make your basis $750,000 and depreciate $27,000/year, that amount would only be deductible if you have enough passive income (rent) to offset it and your other deductible items...IF you make $150,000/year and you don't have any other sources of passive income. This was a screw job by the Trump tax bill designed to hurt the middle class and make it only possible for the very wealthy to afford rental properties.

Passive losses have always been limited and someone who has a couple rental properties and a real job was never going to qualify as a real estate professional anyway. Not sure TCJA is the correct scapegoat for this "screw job."

OldArmyBrent said:

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Passive losses have always been limited and someone who has a couple rental properties and a real job was never going to qualify as a real estate professional anyway. Not sure TCJA is the correct scapegoat for this "screw job."

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You are correct, as I believe the limits have been around for many years and remain unchanged. You are also correct about the real estate professional loophole, but I wasn't referring to that (By the way, I believe that congress still considers themselves to be real estate professionals).

I was mainly alluding to the ability of the wealthy to pool multiple real estate assets that always generate enough passive income to offset any losses, therefore making huge amounts of income untaxable. This allows them to accrue huge equity gains against which they can borrow, etc.

It's a game that the middle class should be allowed to play as well, just on smaller scale. The $100,000/$150,000 limit is just another way for the wealthy to tell the middle class to "know your place."

Chasing another rabbit here, but I'm frustrated dealing with the early admissions college racket as well, which also pits the wealthy against the middle class.

Guess I'm not familiar with a 100/150 limit. I know there was a change to individual loss rules but if PAL are limited to zero, I don't understand the 100/150 limitation.

Diggity said:

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Looks like the IRS suggests using county appraisal values to get % land value.

https://www.irs.gov/pub/irs-regs/depreciation_faqs_v2.pdf

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I use the allocation method sometimes.

If there is a new subdivision popping up around you, go by and ask the realtors, or project managers "what's the typical lot price (vacant land) to ask or sell price (home + land) as a percent?"

Often times they don't mind a quick 1 minute conversation about it, and the information can prove valuable.