WEBVTT NOTE This file was generated by Descript 00:00:08.209 --> 00:00:11.840 Speaker: Welcome to Real Estate is Taxing, where we talk about all things real estate 00:00:11.870 --> 00:00:16.869 tax and break down complex concepts into understandable, entertaining tax topics. 00:00:17.440 --> 00:00:21.259 My name is Natalie Kalady, I'm your host, and I am so excited 00:00:21.259 --> 00:00:22.670 that you've decided to join me. 00:00:23.055 --> 00:00:23.505 Hello. 00:00:23.505 --> 00:00:24.645 Hello everyone. 00:00:24.645 --> 00:00:26.595 Welcome to today's episode. 00:00:27.255 --> 00:00:32.295 I wanted to take a quick moment to mention that there is so much 00:00:32.385 --> 00:00:34.575 incredible tax education coming up. 00:00:34.605 --> 00:00:37.155 If you are a tax professional who is listening. 00:00:37.515 --> 00:00:41.955 And you are hoping to get in some CE this summer to attend some great webinars. 00:00:42.375 --> 00:00:46.275 I would like to invite you to visit my website, which is natalie.tax 00:00:46.695 --> 00:00:48.435 and check out everything coming up. 00:00:48.465 --> 00:00:50.085 I'm speaking at multiple conferences. 00:00:50.085 --> 00:00:51.885 I'm going to be all across the country. 00:00:52.215 --> 00:00:55.785 Doing a handful of online webinars, it is going to be fantastic. 00:00:56.275 --> 00:01:00.415 if you are an investor listening, come check me out at BP con this year. 00:01:00.745 --> 00:01:05.185 I will be on the tax panel as well as doing a tax workshop on the first 00:01:05.185 --> 00:01:08.005 day with the amazing Amanda Hunt. 00:01:08.635 --> 00:01:13.615 So today, guys, I want to chat with you about. 00:01:14.005 --> 00:01:19.225 Something that I think isn't so much misunderstood, but people just 00:01:19.225 --> 00:01:20.875 choose to willfully do it wrong. 00:01:21.265 --> 00:01:25.165 And I don't understand why I am just such a purist when it comes to following 00:01:25.165 --> 00:01:26.995 rules that I think are reasonable. 00:01:26.995 --> 00:01:28.075 That's why I'm an accountant. 00:01:28.705 --> 00:01:31.945 That I don't understand why someone would choose to do something wrong when 00:01:31.945 --> 00:01:37.825 there's not really benefit or where there's like a cut and dry answer to it. 00:01:37.855 --> 00:01:38.185 Right. 00:01:38.665 --> 00:01:39.265 So. 00:01:40.075 --> 00:01:43.645 Today, what I want to talk to you about is when you set up a rental property. 00:01:44.545 --> 00:01:47.695 You get to choose your depreciable value. 00:01:48.415 --> 00:01:52.525 And this is because it is not equal to your purchase price. 00:01:52.555 --> 00:01:53.605 When you buy a rental. 00:01:54.025 --> 00:01:58.195 You are only allowed to depreciate the building and improvements portion. 00:01:58.675 --> 00:01:59.305 Land. 00:01:59.965 --> 00:02:01.435 Doesn't wear out in theory. 00:02:01.885 --> 00:02:06.745 So when you purchase something as one lump sum, which is typically what happens when 00:02:06.745 --> 00:02:08.125 you buy a piece of real estate, right. 00:02:08.125 --> 00:02:10.705 You're paying one price for everything. 00:02:11.185 --> 00:02:14.935 You have to use a reasonable method for splitting the two up. 00:02:15.565 --> 00:02:18.145 And there's a handful of ways you can do this. 00:02:18.595 --> 00:02:22.825 I have seen some really off the walls way that people have chosen 00:02:22.825 --> 00:02:25.645 to try to justify for doing this. 00:02:26.045 --> 00:02:29.075 But in the end there's a handful of reasonable methods. 00:02:29.715 --> 00:02:31.065 So a quick recap. 00:02:31.335 --> 00:02:35.265 Depreciation is basically the tax codes way of saying if you 00:02:35.265 --> 00:02:38.715 are using an asset over time to generate income in your business. 00:02:39.285 --> 00:02:40.755 It should go down in value. 00:02:40.755 --> 00:02:41.925 It should be wearing out. 00:02:42.525 --> 00:02:45.675 And so because of this, they've created in the code. 00:02:46.305 --> 00:02:49.995 A handful of depreciable lives and methods, so that 00:02:49.995 --> 00:02:51.765 there's a standardized way. 00:02:52.125 --> 00:02:53.625 To depreciate items. 00:02:54.475 --> 00:02:58.675 for real estate, this is 27 and a half years for residential. 00:02:59.095 --> 00:03:01.885 Or 39 years for anything that is non-residential. 00:03:02.435 --> 00:03:05.075 what this means when you purchase a piece of real estate that 00:03:05.075 --> 00:03:06.635 you put in services or rental. 00:03:07.085 --> 00:03:09.335 The value of what you paid for. 00:03:09.755 --> 00:03:14.405 We need to separate out land value and then the remaining amount for 00:03:14.405 --> 00:03:15.875 your building and improvements. 00:03:16.235 --> 00:03:21.035 We get to write that off, across that 27 and a half or 39 years. 00:03:21.735 --> 00:03:25.785 When you purchase a property, there's likely also going to be some other costs. 00:03:26.175 --> 00:03:29.295 Many of these get added to that starting amount. 00:03:29.325 --> 00:03:30.735 We call it your basis. 00:03:31.095 --> 00:03:33.345 These get added to your starting basis as well. 00:03:33.645 --> 00:03:35.175 So any of the other costs. 00:03:35.325 --> 00:03:39.285 It took to acquire the property that are connected to the 00:03:39.345 --> 00:03:40.905 actual asset specifically. 00:03:40.905 --> 00:03:43.155 I often get added into basis. 00:03:43.755 --> 00:03:47.085 So some of these will be on your closing document, some won't. 00:03:47.145 --> 00:03:50.565 So if you have a Hutter Alda statement, On there, you will likely 00:03:50.565 --> 00:03:56.235 have some fees related to insurance or transfer fees, things like that. 00:03:56.775 --> 00:04:01.695 Anything that is specifically related to the cost of buying the property. 00:04:01.695 --> 00:04:03.795 If there's an inspection that makes it onto there. 00:04:04.275 --> 00:04:06.585 All of these are going to get added to your basis. 00:04:07.305 --> 00:04:10.695 Things that don't get added to basis are going to be things 00:04:10.725 --> 00:04:13.125 like escrow account amounts. 00:04:13.275 --> 00:04:14.865 So if you have to prepay. 00:04:15.285 --> 00:04:20.745 Your homeowner's insurance or prepay some kind of a buffer into escrow. 00:04:21.165 --> 00:04:23.595 Those don't get added to basis or expensed. 00:04:23.805 --> 00:04:25.395 They're held in an escrow account. 00:04:25.425 --> 00:04:30.835 This is just a separate account by the loan company that is 00:04:30.865 --> 00:04:32.155 holding some of your funds. 00:04:32.215 --> 00:04:34.255 So you don't get too expensive or. 00:04:34.335 --> 00:04:36.225 Amortize it it's just there. 00:04:36.225 --> 00:04:38.985 And then you expense it as costs are paid out of that account. 00:04:39.685 --> 00:04:44.815 If there are expenses on your closing statement, which are typically these fall 00:04:44.815 --> 00:04:49.135 under the category of items that could be income or expense, if there wasn't a sale. 00:04:49.525 --> 00:04:55.365 Prepaid real estate taxes Transferred rents for a new owner or property taxes. 00:04:55.755 --> 00:04:58.275 Most of those things fall into the expense category. 00:04:59.085 --> 00:05:03.735 Anything that is a prepaid to escrow, goes into its own separate bucket. 00:05:03.765 --> 00:05:07.365 It is neither an expense nor something we add to basis. 00:05:08.235 --> 00:05:11.985 And then the other thing to exclude is going to be your loan costs. 00:05:12.435 --> 00:05:16.305 So any of the costs that are directly connected to the 00:05:16.305 --> 00:05:18.015 loan to acquire the property. 00:05:18.705 --> 00:05:21.945 Those are amortized separately over the life of the loan. 00:05:22.645 --> 00:05:26.245 when you buy a property, you have costs related to the property, and then you 00:05:26.245 --> 00:05:30.535 have costs that the lender specifically requested or needed to get you the loan. 00:05:30.925 --> 00:05:33.625 They're normally broken out into a whole separate category 00:05:33.625 --> 00:05:34.885 on your closing statement. 00:05:35.635 --> 00:05:39.115 These loan costs are not tied to the property necessarily. 00:05:39.115 --> 00:05:41.905 They're tied to that loan, which might change over time. 00:05:42.605 --> 00:05:45.425 So you're going to want to add those costs up on their own. 00:05:46.145 --> 00:05:48.125 And you will have a separate line item. 00:05:48.665 --> 00:05:52.535 On your depreciation schedule that will say loan costs, you know, 00:05:52.775 --> 00:05:55.025 $4,800 or whatever it ends up being. 00:05:55.685 --> 00:05:59.045 And those will be amortized across 30 years or 15 years, 00:05:59.045 --> 00:06:00.425 whatever the life of your loan is. 00:06:01.055 --> 00:06:01.985 This is important. 00:06:01.985 --> 00:06:03.425 And I often see this overlooked. 00:06:03.995 --> 00:06:05.615 Because a lot of us refinance loans. 00:06:06.155 --> 00:06:09.095 If you have loan fees that you're still writing off, you know, you're 00:06:09.095 --> 00:06:14.435 only in year 12 out of 15 and you refinance into a whole new loan. 00:06:14.915 --> 00:06:16.805 The balance of those loan fees. 00:06:17.525 --> 00:06:20.105 From your first loan, you get to write those off. 00:06:20.105 --> 00:06:21.095 The loan is gone. 00:06:21.095 --> 00:06:23.705 We don't get to keep expensing stuff for something we got rid of. 00:06:23.755 --> 00:06:26.725 and then that new loan will have its own new set of fees. 00:06:27.175 --> 00:06:30.715 And those will get added to that schedule as of that date across 00:06:30.715 --> 00:06:32.425 however many years that new loan is. 00:06:33.115 --> 00:06:34.195 So when you purchase. 00:06:34.655 --> 00:06:36.665 You're going to have on your closing statement. 00:06:37.445 --> 00:06:38.075 Loan fees. 00:06:38.105 --> 00:06:40.865 That'll be in their own bucket, amortized over the life of the loan. 00:06:41.575 --> 00:06:46.645 Escrow account items that are not an income or expense or depreciate it, these 00:06:46.645 --> 00:06:50.845 are just going to be items you prepaid and there they're going to be expensed 00:06:50.875 --> 00:06:55.045 as they're actually paid to the insurance company or to the county for taxes. 00:06:55.565 --> 00:06:58.265 The escrow company is basically just holding them on your behalf. 00:06:58.865 --> 00:07:00.635 And then you will have some closing costs. 00:07:01.145 --> 00:07:03.875 And these are going to be what we add into basis. 00:07:04.625 --> 00:07:09.065 once you have your closing costs, And any other costs that took 00:07:09.065 --> 00:07:10.415 you to acquire the property? 00:07:10.905 --> 00:07:13.785 These might be travel costs to go view the property. 00:07:14.235 --> 00:07:15.195 These might be. 00:07:15.525 --> 00:07:20.175 Additional inspections, or even if you had tried to buy another property in the 00:07:20.175 --> 00:07:26.235 same city, And it fell through and maybe that whole endeavor costs you $8,000. 00:07:26.235 --> 00:07:28.335 You know, you had to pay for some inspections, you put down 00:07:28.335 --> 00:07:29.895 some nonrefundable earnest money. 00:07:30.405 --> 00:07:33.945 And then after all of a sudden done, you decided it wasn't a good purchase. 00:07:33.945 --> 00:07:37.245 The inspections came back, horrible building is just like filled with snakes. 00:07:37.605 --> 00:07:38.835 So you walk away from it. 00:07:39.465 --> 00:07:40.965 That $8,000. 00:07:41.235 --> 00:07:44.865 That you put out, but didn't end up purchasing a property from 00:07:45.285 --> 00:07:48.735 gets rolled into the next property that you do actually purchase. 00:07:49.185 --> 00:07:50.205 It was a cost. 00:07:50.685 --> 00:07:53.385 That was incurred to ultimately buy a rental. 00:07:53.415 --> 00:07:53.655 Right. 00:07:53.655 --> 00:07:55.575 It got you to that final destination there. 00:07:55.935 --> 00:07:58.665 So you get to track all of those costs as well. 00:07:59.265 --> 00:08:02.085 This is something I get asked pretty frequently because people will say, you 00:08:02.085 --> 00:08:06.975 know, I spent $12,000 last year looking at rentals and I didn't end up buying 00:08:06.975 --> 00:08:11.535 one, or I spent this much money, like going to a new city and investigating 00:08:11.535 --> 00:08:13.005 to try to buy properties there. 00:08:13.065 --> 00:08:14.205 How can I expense it? 00:08:14.625 --> 00:08:15.285 You can't. 00:08:15.885 --> 00:08:16.725 To the IRS. 00:08:16.725 --> 00:08:18.705 Your business is the rental, right? 00:08:18.705 --> 00:08:19.815 Those are one in the same. 00:08:20.565 --> 00:08:24.975 If it doesn't exist yet, if you literally don't have an 00:08:25.005 --> 00:08:26.565 asset to create a schedule II. 00:08:26.745 --> 00:08:28.365 For a rental property. 00:08:28.905 --> 00:08:30.735 Quote, rental property business. 00:08:31.305 --> 00:08:32.475 There is nowhere to expense. 00:08:32.475 --> 00:08:33.075 These costs. 00:08:33.105 --> 00:08:34.095 You get to track them. 00:08:34.815 --> 00:08:36.405 They're basically your startup costs. 00:08:37.005 --> 00:08:41.325 So any costs that took you pre purchased that were directly 00:08:41.325 --> 00:08:42.765 related to finding this property? 00:08:43.155 --> 00:08:44.115 And these have to be direct. 00:08:44.175 --> 00:08:45.165 Don't get obscure with it. 00:08:45.195 --> 00:08:46.305 I don't want to hear you. 00:08:46.665 --> 00:08:51.135 Trying to add in costs that you spent to like watch a webinar four years ago, 00:08:51.135 --> 00:08:53.355 about how houses are built, like Nope. 00:08:53.805 --> 00:08:56.415 Anything directly related, like you tried to buy a similar house, 00:08:56.445 --> 00:08:59.505 it fell through, you tried to buy something else in that same area. 00:09:00.075 --> 00:09:02.685 If you were trying to buy a house across the country, you were looking 00:09:02.685 --> 00:09:05.175 at two different rental markets, completely different places. 00:09:05.535 --> 00:09:06.795 We don't get to count those. 00:09:07.155 --> 00:09:10.055 Typically it's based on where you are geographically. 00:09:10.475 --> 00:09:15.155 So, if you are looking at properties in Florida and also Oregon, and 00:09:15.245 --> 00:09:18.215 you spend some money looking at properties in Oregon, but you end 00:09:18.215 --> 00:09:22.205 up only buying in Florida, we don't get to get those Oregon costs yet. 00:09:22.505 --> 00:09:25.385 Not until you quote, open your business in Oregon. 00:09:25.385 --> 00:09:26.285 Does it count there? 00:09:26.645 --> 00:09:27.065 So. 00:09:27.425 --> 00:09:28.655 Just a few nuances. 00:09:29.355 --> 00:09:32.655 So once you got all of those costs, your prior costs, your closing 00:09:32.655 --> 00:09:34.095 costs and your purchase costs. 00:09:34.575 --> 00:09:37.545 These are going to create your starting basis in this property. 00:09:38.145 --> 00:09:41.535 And then from there, we need to back out land value. 00:09:42.195 --> 00:09:44.205 Because land, we don't get to depreciate. 00:09:44.355 --> 00:09:45.285 It doesn't wear out. 00:09:45.685 --> 00:09:49.735 So we need a way to figure out what the amount is for the land value. 00:09:50.125 --> 00:09:55.135 So that we know what portion of the basis is appreciable and what isn't. 00:09:55.715 --> 00:09:58.325 there are a few acceptable ways to do this. 00:09:58.325 --> 00:10:01.865 And one that I would say is completely not acceptable. 00:10:01.865 --> 00:10:04.565 There's actually two, I would say are completely not acceptable. 00:10:05.435 --> 00:10:07.175 So starting with the worst, 00:10:07.225 --> 00:10:10.915 I've heard this from tax professionals, quote, you can't see I'm air quoting. 00:10:11.245 --> 00:10:12.265 Tax professionals. 00:10:12.955 --> 00:10:19.165 That you should just not depreciate things like just don't appreciate the property. 00:10:19.585 --> 00:10:22.765 Because when you sell something that's been depreciated, you have to pay it back. 00:10:23.035 --> 00:10:26.575 So to avoid that recapture later, just don't write it off today. 00:10:27.295 --> 00:10:28.525 That doesn't work. 00:10:29.095 --> 00:10:31.615 Depreciation is allowed or allowable. 00:10:32.095 --> 00:10:36.595 Which means whether you were sharp enough to take the benefit year to 00:10:36.595 --> 00:10:38.545 year and actually get your write off. 00:10:39.025 --> 00:10:40.345 When you go to sell it. 00:10:40.765 --> 00:10:43.435 You are going to be taxed as though you did. 00:10:43.945 --> 00:10:44.515 Anyway. 00:10:44.995 --> 00:10:48.295 The calculation when you sell is based on the amount of depreciation 00:10:48.295 --> 00:10:49.285 that should have been taken. 00:10:49.735 --> 00:10:51.085 If you didn't take it. 00:10:51.655 --> 00:10:52.615 That's on you. 00:10:52.795 --> 00:10:55.105 You can fix it at that point, but just know. 00:10:55.555 --> 00:10:59.125 That the idea of don't appreciate anything at all, because you'll 00:10:59.125 --> 00:11:02.575 pay it back later and think you're like gaming the system here. 00:11:02.575 --> 00:11:06.355 You are not, you are just setting yourself up to pay a tax on something 00:11:06.355 --> 00:11:08.065 that you never got any benefit for. 00:11:08.365 --> 00:11:13.195 So the first one is you have to depreciate depreciable property, not optional. 00:11:13.895 --> 00:11:15.065 The second one is. 00:11:15.815 --> 00:11:16.445 Don't. 00:11:17.165 --> 00:11:18.215 Lump it all together. 00:11:18.425 --> 00:11:19.985 Don't forget about land. 00:11:20.585 --> 00:11:23.585 You always want to separate out bland value. 00:11:24.245 --> 00:11:25.895 It's not optional either again. 00:11:25.895 --> 00:11:27.005 That is not appreciable. 00:11:27.035 --> 00:11:28.985 So you do have to separate that out. 00:11:29.585 --> 00:11:34.085 It is not uncommon to see an appreciation report with nothing listed for land. 00:11:34.895 --> 00:11:39.275 And what I will also say as a tip is whenever possible, if you are 00:11:39.305 --> 00:11:43.565 either doing your own tax return or you are working with a professional. 00:11:44.315 --> 00:11:46.655 First thing is you will always want to review this schedule. 00:11:47.255 --> 00:11:50.555 A lot of professionals don't include it as a default with the tax return. 00:11:51.125 --> 00:11:51.905 Ask for it. 00:11:52.295 --> 00:11:54.995 You need to look at this and it should be included. 00:11:55.955 --> 00:11:58.985 So you want to look at this schedule and you should see an amount for 00:11:59.045 --> 00:12:02.135 building or improvements or the house address, whatever they're calling it. 00:12:02.835 --> 00:12:06.825 And also ideally, a separate amount for land specifically. 00:12:07.695 --> 00:12:09.525 The reason being without this. 00:12:10.095 --> 00:12:14.295 If, what I see is just one amount there with nothing separated for land. 00:12:14.865 --> 00:12:18.585 I don't know if five years ago your tax professional. 00:12:19.035 --> 00:12:23.205 Actually separated land out of there, and then they just didn't list it 00:12:23.325 --> 00:12:26.565 like, so the amount listed for the building is actually net of land. 00:12:27.135 --> 00:12:28.845 But they didn't list land. 00:12:28.845 --> 00:12:29.625 So I don't know. 00:12:30.135 --> 00:12:34.485 Or if they didn't back land out and this is actually too high. 00:12:35.025 --> 00:12:38.655 So having two separate line items for your depreciable amount of 00:12:38.655 --> 00:12:42.675 building and improvements and separately for land is ideal. 00:12:43.425 --> 00:12:45.795 And I know I throw out a lot of these little things that are 00:12:45.795 --> 00:12:47.115 like, this is really helpful. 00:12:47.115 --> 00:12:49.065 Or if you can try to see this ideally. 00:12:49.605 --> 00:12:50.685 And it's because. 00:12:51.525 --> 00:12:52.935 This is going to be a small side. 00:12:52.935 --> 00:12:53.295 Tangent. 00:12:53.295 --> 00:12:54.675 I promise I'll rein it in quickly. 00:12:55.665 --> 00:13:00.915 At this point, 70% of tax professionals who were practicing in the last 10 years. 00:13:01.245 --> 00:13:02.805 Are at about retirement age. 00:13:03.285 --> 00:13:09.195 So we are having a huge disproportion and supply demand with available 00:13:09.195 --> 00:13:11.685 tax professionals who are taking on clients and this and that. 00:13:12.405 --> 00:13:16.515 And it's only going to get harder to find good tax professionals. 00:13:17.385 --> 00:13:19.095 So every little thing counts. 00:13:19.635 --> 00:13:22.245 And a lot of time with a tax professional. 00:13:22.395 --> 00:13:25.485 Not always, I don't price this way, but many price based on time. 00:13:26.175 --> 00:13:30.015 So if, when looking at your return, They now have to go back and look at 00:13:30.015 --> 00:13:33.885 your purchase documents and ask more questions and like double check things. 00:13:33.885 --> 00:13:35.175 Because looking at this. 00:13:35.805 --> 00:13:37.245 It could be very wrong. 00:13:37.245 --> 00:13:42.015 We don't know if land was netted out or not just because the prior professional 00:13:42.045 --> 00:13:44.115 got lazy or just didn't think it mattered. 00:13:44.595 --> 00:13:48.705 That adds time and time adds well, literally time, but also money. 00:13:48.735 --> 00:13:51.975 If you are paying by the hour, you don't want to pay them for another 00:13:51.975 --> 00:13:54.945 hour of their time looking into something that should have just been. 00:13:55.395 --> 00:13:56.685 Clearly stated the first time. 00:13:56.925 --> 00:13:59.685 So that's my little side tangent for today. 00:14:00.385 --> 00:14:02.425 you want to make sure land is separated out. 00:14:03.235 --> 00:14:07.585 And that there is a reasonable way for doing it right? 00:14:07.585 --> 00:14:11.515 Because now what you're thinking is okay, Natalie, but I, I paid 00:14:11.935 --> 00:14:13.825 $200,000 for this whole property. 00:14:13.825 --> 00:14:15.355 How do I know what amount of that. 00:14:15.685 --> 00:14:16.525 Is the land. 00:14:17.335 --> 00:14:19.735 So, like I said, starting with the worst options. 00:14:20.255 --> 00:14:22.775 The worst one being, not separating land. 00:14:23.055 --> 00:14:24.405 The next option being. 00:14:25.035 --> 00:14:28.245 Using a general rule of thumb. 00:14:28.845 --> 00:14:33.255 I actually know of some pretty like large reputable tax firms doing it this way. 00:14:33.645 --> 00:14:37.995 Based on, based on laziness, they'll call it efficiency, but doing something 00:14:37.995 --> 00:14:42.255 wrong with the hopes of not getting caught is not efficiency to me. 00:14:42.285 --> 00:14:42.585 Right. 00:14:42.585 --> 00:14:45.255 Like, but you know, whatever, not my, not my circus. 00:14:45.735 --> 00:14:51.765 So the general rule of the method would be saying that we always use on any property. 00:14:52.275 --> 00:14:57.105 Like an 80, 20 split or 85 15, where we'll take 80% of the 00:14:57.105 --> 00:14:58.635 value is building and 20 is land. 00:14:59.025 --> 00:15:01.365 We just use that no matter what on anything. 00:15:02.145 --> 00:15:02.715 And. 00:15:03.525 --> 00:15:08.875 This is an appropriate, it's not something that is like an actual method of any sort. 00:15:09.475 --> 00:15:14.995 Because property and land values can be significantly different. 00:15:15.535 --> 00:15:16.885 Based on where you are. 00:15:17.695 --> 00:15:19.015 I used to live in Seattle. 00:15:19.255 --> 00:15:21.925 And when I lived there, I would have clients whose properties 00:15:21.925 --> 00:15:23.155 would have a land value. 00:15:23.515 --> 00:15:26.365 That was often the bulk of the value. 00:15:26.755 --> 00:15:29.365 I've seen land values over 70%. 00:15:30.265 --> 00:15:34.945 So in Seattle, you would have closer to an inverse of that standard where 00:15:34.945 --> 00:15:40.825 it's closer to 70% of the value being land, which is non depreciable. 00:15:41.155 --> 00:15:43.195 And then only 30 being the building. 00:15:43.855 --> 00:15:48.445 Versus when I have clients who own properties in tiny towns in rural 00:15:48.445 --> 00:15:55.825 America, it is like 90%, 95% building value and only 5% is the land. 00:15:56.305 --> 00:15:57.565 So land value. 00:15:58.015 --> 00:16:01.825 Is not, not equal for every property. 00:16:01.855 --> 00:16:03.265 The next option. 00:16:04.225 --> 00:16:07.285 The next three, I would say are reasonable. 00:16:07.315 --> 00:16:08.845 You can use any of these three. 00:16:09.295 --> 00:16:09.865 And. 00:16:10.495 --> 00:16:14.365 The one that I typically will start with and I recommend you start with as 00:16:14.365 --> 00:16:17.995 well, is the county assessors amounts. 00:16:18.745 --> 00:16:19.345 Now. 00:16:20.045 --> 00:16:24.545 I don't know about you guys, but my county seems to think properties are worth. 00:16:24.965 --> 00:16:28.805 All kinds of values that are nowhere near current purchase prices. 00:16:28.805 --> 00:16:29.975 Current fair market value. 00:16:29.975 --> 00:16:31.655 They're often skewed. 00:16:32.285 --> 00:16:33.725 For the overall value. 00:16:34.655 --> 00:16:35.915 No argument there. 00:16:36.335 --> 00:16:43.235 But the argument being that someone who works formally for the county, like 00:16:43.685 --> 00:16:47.315 someone in this role has more knowledge. 00:16:47.705 --> 00:16:51.785 And more of an appropriate skillset to separate out. 00:16:52.145 --> 00:16:53.315 Land and building. 00:16:53.975 --> 00:16:55.745 Then just you or I do. 00:16:56.135 --> 00:16:56.435 Right. 00:16:56.435 --> 00:17:00.005 So county assessor website, you're going to go to the county. 00:17:00.395 --> 00:17:03.635 If you search for your county plus real property. 00:17:04.175 --> 00:17:09.665 Your county plus real property lookup your county plus real property. 00:17:10.005 --> 00:17:13.965 Value any of these keywords should hopefully land you there. 00:17:14.275 --> 00:17:18.475 Your county plus assessor plus real property, like throw these all in there 00:17:18.475 --> 00:17:20.095 to try to get you to the right page. 00:17:20.725 --> 00:17:22.165 Depending on where you are. 00:17:22.165 --> 00:17:26.555 Some of these are like Wix page built in 1998. 00:17:26.555 --> 00:17:27.245 It seems so. 00:17:27.245 --> 00:17:29.495 They're hard to find if you're in a smaller county. 00:17:29.975 --> 00:17:33.215 Some of them aren't available online and you have to contact the county, but most 00:17:33.215 --> 00:17:35.075 are, and most are pretty easy to find. 00:17:35.775 --> 00:17:37.665 So you were going to go to the county website. 00:17:38.235 --> 00:17:41.025 And you are going to look up your properties address. 00:17:41.895 --> 00:17:42.405 From there. 00:17:42.405 --> 00:17:47.895 It is going to give you a summary page that should have values for land. 00:17:48.345 --> 00:17:49.335 Improvements. 00:17:50.025 --> 00:17:52.215 Building sometimes they're separate because there might be 00:17:52.215 --> 00:17:53.595 like a shed or an outbuilding. 00:17:54.295 --> 00:17:57.775 And what you are going to do is you're going to want it for the current year. 00:17:57.805 --> 00:18:00.265 We want the current year, whenever you're putting the property in service. 00:18:01.135 --> 00:18:02.575 And you are going to use. 00:18:03.175 --> 00:18:04.855 The ratio they use. 00:18:04.885 --> 00:18:07.885 I do not use the literal amounts. 00:18:08.575 --> 00:18:14.425 So if they say that the land is worth $20,000, And the 00:18:14.455 --> 00:18:16.975 building is worth $80,000. 00:18:17.365 --> 00:18:23.245 You are going to take 80% and multiply it by whatever your actual basis 00:18:23.245 --> 00:18:25.255 is, whatever that total is of what. 00:18:25.555 --> 00:18:28.945 You paid with closing costs and other costs to get the property. 00:18:29.785 --> 00:18:32.305 That is what you are multiplying by 80%. 00:18:32.875 --> 00:18:35.035 You were not just using the literal number. 00:18:35.455 --> 00:18:38.545 They are saying it's worth, that's not reliable. 00:18:39.115 --> 00:18:43.735 The percentage, the allocation between land versus building is what we're using. 00:18:44.215 --> 00:18:49.045 So you want to take that same ratio and apply it to whatever your actual cost was. 00:18:49.615 --> 00:18:51.205 This is the most common method. 00:18:52.015 --> 00:18:55.075 And this is what I would recommend doing as your starting point. 00:18:55.465 --> 00:18:57.955 And make sure you save a copy of that page. 00:18:57.985 --> 00:19:00.145 Like print it to a PDF, save it in your file. 00:19:00.565 --> 00:19:04.225 In case this is ever questioned, you can prove where you got that number from. 00:19:04.615 --> 00:19:09.205 Because a lot of counties don't keep historic data on this up forever. 00:19:09.265 --> 00:19:10.045 It's pretty limited. 00:19:10.745 --> 00:19:13.775 The next thing to look at would be your appraisal. 00:19:14.615 --> 00:19:18.305 When you purchased the property, there's a good chance you had an appraisal done. 00:19:18.305 --> 00:19:20.495 If you used a lender. 00:19:21.335 --> 00:19:23.585 Some appraisals go into land value. 00:19:23.585 --> 00:19:24.455 Some do not. 00:19:25.025 --> 00:19:29.555 So if your appraisal has a detailed site value appraisal with it, 00:19:29.555 --> 00:19:33.365 or land value assessment, land value appraisal, as part of it. 00:19:33.995 --> 00:19:35.585 Then you could use this amount. 00:19:36.215 --> 00:19:37.265 Not all appraisals. 00:19:37.265 --> 00:19:37.625 Do. 00:19:38.105 --> 00:19:42.215 What I typically do as my starting point is I look at both of these. 00:19:42.725 --> 00:19:44.045 And I see, which is better. 00:19:44.525 --> 00:19:48.395 So they're often pretty close, but it's always worth it to look at the county, 00:19:48.425 --> 00:19:50.285 figure out what the amount would be. 00:19:51.035 --> 00:19:53.105 On the county, like using that ratio. 00:19:53.585 --> 00:19:56.765 And then also look at your appraisal and see what your land value is there. 00:19:57.215 --> 00:20:00.605 The goal is typically you want the lowest land value possible. 00:20:01.355 --> 00:20:03.095 Because of the more building value you have. 00:20:03.605 --> 00:20:08.285 The more depreciable value you have, which means the more your annual write-off is. 00:20:08.355 --> 00:20:09.675 Your third option. 00:20:09.675 --> 00:20:10.755 That is. 00:20:11.175 --> 00:20:16.095 I would say a little less reliable, but still could be defended is having 00:20:16.125 --> 00:20:18.585 a like limited scope appraisal done. 00:20:18.895 --> 00:20:21.685 Or a site value done by an agent. 00:20:22.055 --> 00:20:23.555 Who was basically pulling comps. 00:20:24.275 --> 00:20:28.235 So, if you think that both of those first two values are way off. 00:20:29.045 --> 00:20:34.645 If you have an agent who is skilled and who is appropriate 00:20:34.645 --> 00:20:37.765 to pull comparable values for. 00:20:38.275 --> 00:20:42.415 Raw land that has sold nearby in a recent timeframe. 00:20:43.115 --> 00:20:44.825 That can be used as well. 00:20:45.345 --> 00:20:50.445 if they can literally prove that, well, I can show 12 other lots that 00:20:50.445 --> 00:20:54.615 are the same size that have sold within the last six months within a mile. 00:20:55.005 --> 00:20:56.745 And they were all of this value. 00:20:57.225 --> 00:21:00.105 You have an argument for the value of your lot as well. 00:21:00.615 --> 00:21:04.905 So those are the three methods I would recommend using kind of in that order. 00:21:04.995 --> 00:21:06.705 I always do one and two together. 00:21:06.735 --> 00:21:10.485 Like I will always do look at the county assessor, look at the 00:21:10.485 --> 00:21:11.955 formal appraisal from purchase. 00:21:12.375 --> 00:21:13.155 And compare them. 00:21:13.845 --> 00:21:17.745 If both of those are awful, or we just want more information, I will 00:21:17.745 --> 00:21:22.635 suggest that the taxpayer have a list of land comms, polled as well. 00:21:23.325 --> 00:21:26.775 those are kind of your options for choosing your land versus building value. 00:21:27.375 --> 00:21:28.875 Going past that. 00:21:29.565 --> 00:21:31.875 It has to be a reasonable amount. 00:21:32.535 --> 00:21:34.965 I recently had a. 00:21:35.955 --> 00:21:37.425 A few people reach out to me. 00:21:37.815 --> 00:21:41.625 From a real estate group where I had spoke at one of their conferences 00:21:41.625 --> 00:21:43.405 and they had they had a CPA. 00:21:44.005 --> 00:21:46.735 On a podcast recently or something like that related to the group. 00:21:46.735 --> 00:21:48.205 And so a couple of people worked with them. 00:21:48.685 --> 00:21:51.925 And then a couple of people reached out to me after, cause they were like, 00:21:51.925 --> 00:21:53.245 Natalie, this doesn't seem right. 00:21:54.085 --> 00:21:56.245 And this CPA had just chosen. 00:21:56.785 --> 00:21:58.795 I have no idea where he came out, but the amounts. 00:21:59.275 --> 00:22:03.085 But on 25 different properties, I looked at, none of them had a 00:22:03.085 --> 00:22:05.995 land value of more than $5,000. 00:22:06.535 --> 00:22:11.365 And these were some properties were 600, $700,000 and it would be like $4,800 land. 00:22:12.265 --> 00:22:13.105 I have no idea. 00:22:13.465 --> 00:22:14.785 Where they came up with that amount. 00:22:15.535 --> 00:22:18.235 And the other thing I will note as a red flag. 00:22:19.195 --> 00:22:23.365 Or like a, I guess an orange flag, like slow down and take a look at this. 00:22:23.365 --> 00:22:24.835 If you see it on your tax return. 00:22:25.535 --> 00:22:28.535 If you get those taxes from your tax professional. 00:22:29.195 --> 00:22:32.855 And on your depreciation schedule, if the amounts are exact dollar 00:22:32.855 --> 00:22:35.855 amounts, That's pretty unlikely, right? 00:22:35.855 --> 00:22:38.375 maybe your purchase price was an exact dollar amount. 00:22:38.375 --> 00:22:40.025 Like you paid $200,000. 00:22:40.655 --> 00:22:42.725 But then there's some fees and closing costs. 00:22:42.725 --> 00:22:46.595 And once all of that is added in, and then we split it with a ratio. 00:22:47.015 --> 00:22:50.435 The odds of that all landing on exact even dollar amounts. 00:22:50.945 --> 00:22:54.395 And I round I'm not talking like pennies, like we're not talking that it should be. 00:22:54.785 --> 00:22:58.145 You know, $12,500 and 82 cents. 00:22:58.835 --> 00:23:04.025 But if the amounts are 12,500 and like 102,000. 00:23:04.745 --> 00:23:06.995 That's normally pretty unlikely. 00:23:07.325 --> 00:23:10.025 When it's like exact round large numbers like that. 00:23:10.025 --> 00:23:11.405 So always question that. 00:23:11.975 --> 00:23:12.965 To warnings with it. 00:23:12.965 --> 00:23:14.915 One is I've had someone where. 00:23:15.755 --> 00:23:17.945 They almost understood how to do this correctly. 00:23:18.755 --> 00:23:22.535 And they used the literal land amount from the county website. 00:23:23.235 --> 00:23:27.195 And the problem was that they then applied the ratio to figure 00:23:27.195 --> 00:23:28.695 out their building amount. 00:23:29.415 --> 00:23:32.025 So it's like they sorted, they almost got it, but they missed a part. 00:23:32.835 --> 00:23:36.165 And so the end result was their total amount listed. 00:23:36.495 --> 00:23:39.645 Was actually more than what they had paid for the property. 00:23:40.125 --> 00:23:43.215 Because they separated out building value, but then the land for the county 00:23:43.215 --> 00:23:46.575 was higher than what the land would have been based on what they paid. 00:23:46.605 --> 00:23:49.935 And so, because they use the sort of whoops, mix and match. 00:23:50.385 --> 00:23:53.535 When we went to sell it, I was like how does your tax return list 00:23:53.535 --> 00:23:57.465 this property at $28,000 more than what you actually paid for it? 00:23:58.005 --> 00:23:59.655 So be cautious with these. 00:23:59.715 --> 00:24:01.665 I see a lot of mistakes related to this. 00:24:02.365 --> 00:24:06.415 Like I said, that CPA, I have no idea where he was getting like $4,000 on 00:24:06.415 --> 00:24:09.235 these large properties for land value. 00:24:10.045 --> 00:24:10.675 I've got nothing. 00:24:10.705 --> 00:24:11.545 I have no idea. 00:24:12.185 --> 00:24:14.195 But we do have one court case on this. 00:24:14.225 --> 00:24:15.425 It's the Nielsen case. 00:24:15.965 --> 00:24:21.395 So, if you want to read the tax court summary of opinion, it's 2017 dash 31. 00:24:21.965 --> 00:24:26.595 And in this case, this person bought properties in California. 00:24:27.125 --> 00:24:30.335 and the taxpayer did not separate out land value. 00:24:30.665 --> 00:24:32.975 So they were depreciating the full amount. 00:24:33.425 --> 00:24:37.265 Of everything they paid, which included building and land 00:24:37.265 --> 00:24:38.825 value, they did not separate it. 00:24:39.395 --> 00:24:39.965 So. 00:24:40.665 --> 00:24:43.995 When this was looked at under audit, they were like, well, your 00:24:43.995 --> 00:24:47.085 depreciation seems too high for these properties and this and that. 00:24:47.685 --> 00:24:50.295 So for example, on one property. 00:24:51.195 --> 00:24:54.975 The taxpayer had paid $360,000 in 2003. 00:24:55.545 --> 00:24:57.705 And there were three buildings on it at the time. 00:24:57.705 --> 00:24:59.445 It was a multiunit property. 00:25:00.045 --> 00:25:04.305 In 2012, when this was being looked at, the county had the property 00:25:04.305 --> 00:25:07.425 valued at 4 25 and some change. 00:25:07.965 --> 00:25:09.015 But of that. 00:25:09.255 --> 00:25:10.995 Oh, that 425,000. 00:25:11.475 --> 00:25:13.755 $236,000 was land. 00:25:14.085 --> 00:25:19.815 So this was a situation where land value was the majority of the value. 00:25:20.235 --> 00:25:21.045 Versus building. 00:25:21.045 --> 00:25:22.635 So this is why it really matters where you are. 00:25:22.635 --> 00:25:24.105 This was right outside of LA. 00:25:24.405 --> 00:25:26.355 So land value was most of the value. 00:25:26.715 --> 00:25:28.305 So it worked out to. 00:25:28.665 --> 00:25:32.325 The building value, the improvements, the part that the taxpayer should get 00:25:32.325 --> 00:25:35.625 to depreciate would have only been 44%. 00:25:36.105 --> 00:25:37.155 Of the total amount. 00:25:37.755 --> 00:25:41.715 This means they were taking like 60% more of an annual write-off 00:25:41.715 --> 00:25:43.035 than they should've been. 00:25:43.605 --> 00:25:45.555 So they fought about it. 00:25:45.555 --> 00:25:46.965 They took it to tax court. 00:25:47.665 --> 00:25:50.065 And the taxpayer's argument was that. 00:25:50.785 --> 00:25:53.545 The county assessors are nowhere near accurate. 00:25:54.355 --> 00:25:57.055 And like I said earlier, I would agree with that as a whole. 00:25:57.085 --> 00:25:57.295 Right. 00:25:57.295 --> 00:26:00.025 I think the total amount, they value things that is. 00:26:00.445 --> 00:26:04.705 Nowhere near what people have paid for properties fairly often. 00:26:05.335 --> 00:26:08.695 But this was their argument was that the county assessor was just inaccurate. 00:26:09.055 --> 00:26:10.705 It doesn't excuse the part of them. 00:26:10.885 --> 00:26:12.625 I'm not backing out land. 00:26:12.655 --> 00:26:14.755 They didn't make a good faith attempt at it. 00:26:15.595 --> 00:26:19.795 But at the end of the day, What the tax court landed on. 00:26:20.665 --> 00:26:24.175 Was this idea that well, you, as a taxpayer. 00:26:24.655 --> 00:26:28.825 Might be more qualified to speak to the actual value of your property. 00:26:28.855 --> 00:26:30.925 Like, you know, what you paid for it, you know what. 00:26:31.345 --> 00:26:34.165 What similar houses sold for, you were probably looking at 00:26:34.165 --> 00:26:35.575 properties really similarly. 00:26:35.575 --> 00:26:37.165 So they were like, no argument. 00:26:37.645 --> 00:26:40.615 That you have a good idea of the value of your property. 00:26:41.455 --> 00:26:43.135 Where their issue was. 00:26:43.645 --> 00:26:48.295 Was that they felt that even if you know the value of your property, 00:26:49.105 --> 00:26:51.835 You are in no way qualified to know. 00:26:52.285 --> 00:26:58.285 The allocation amounts or how to properly allocate within that value, how much 00:26:58.285 --> 00:27:00.715 is building versus how much is land. 00:27:01.355 --> 00:27:05.885 And the court felt that the county assessor was a much more reliable option. 00:27:06.335 --> 00:27:11.165 So ultimately the tax court has kind of stamped off on the county, assessor 00:27:11.225 --> 00:27:15.335 allocation, being something they consider to be a reliable method to use. 00:27:15.785 --> 00:27:17.675 So that's what I recommend starting with. 00:27:18.255 --> 00:27:19.905 But there are a few different options. 00:27:20.575 --> 00:27:25.375 So as always, I hope that this episode provided some value for you guys and 00:27:25.375 --> 00:27:29.755 helped add a little clarity on how to set up your land versus building 00:27:29.755 --> 00:27:32.275 value for a new rental property. 00:27:32.935 --> 00:27:36.745 If you have any followup questions, I would love to invite 00:27:36.745 --> 00:27:38.335 you to join me on Facebook. 00:27:38.695 --> 00:27:40.705 I do have two different Facebook groups. 00:27:40.705 --> 00:27:44.845 If you're a tax professional, please come check out the rental and real estate 00:27:44.845 --> 00:27:47.125 taxation for tax professionals group. 00:27:47.605 --> 00:27:50.575 If you are a real estate investor, please come join us in the real 00:27:50.575 --> 00:27:52.045 estate tax strategies group. 00:27:52.405 --> 00:27:57.235 I will have links for both in the show notes and as always, I would love it. 00:27:57.235 --> 00:28:01.945 If you would like share and follow and feel free to submit. 00:28:02.275 --> 00:28:04.855 Ideas for new episodes coming forward. 00:28:05.305 --> 00:28:06.295 Thanks so much guys. 00:28:06.325 --> 00:28:07.885 And I will talk to you next week.