Margaret CPA in OH Posted February 5, 2009 Report Share Posted February 5, 2009 A client purchased a 2 family home in 2005. I deducted the value (per auditor's website) of land from total purchase and determined the depreciable amount of the rental by the ratio of square footage. In September, client bought a second 2 family and moved into one unit there and began renting the second unit in the first property. I checked the auditor's website to see if the valuation had changed. It did decrease from $185,000 to $176,440. The real problem is that the land value increased from $9800 to $24,000. I called the auditor's office for an explanation. He said they changed valuation companies in part because of the undervaluation of land by the prior company. So, how do I now value the second unit? The ratios are so different, from 5.3% to 13.6%. It doesn't seem right that the depreciation allocable to the second unit should be so much lower in dollars as a result of the land value and not just the fmv of the property. Thanks for input. Quote Link to comment Share on other sites More sharing options...
BulldogTom Posted February 5, 2009 Report Share Posted February 5, 2009 Margaret, I think you are making a mountain out of a molehill. It seems to me that you used a valid and defendable method of valuing the land for the 2005 purchase. Put that to bed and don't bring it back up. It also seems to me that you are using a valid and defendable method to determine the valuation of the land on the 2008 purchase. Use it and put it to bed. Who cares what it does in relation to the 2005 purchase? They are two different transactions in two very different economic environments. Just my 2 cents. Tom Lodi, CA Quote Link to comment Share on other sites More sharing options...
Margaret CPA in OH Posted February 5, 2009 Author Report Share Posted February 5, 2009 I like your 2 cents. I just think they are being deprived of depreciation on the second rental now that the land has been valued to a much greater percentage than 3 years earlier. I can't figure out any better determination, though. And, as you noted, it is defensible by virtue of the auditor's valuation and the economic changes over time. FMV is FMV... Thanks, again! Quote Link to comment Share on other sites More sharing options...
mcb39 Posted February 5, 2009 Report Share Posted February 5, 2009 I am not changing my values on any rental units that have been depreciating in prior years. Units added this year do have to be added at the current cost. However, those I have so far have been new constructions and clients know what it cost them to erect the building. Am I wrong to be using cost basis minus land rather than appraised basis? Quote Link to comment Share on other sites More sharing options...
Margaret CPA in OH Posted February 5, 2009 Author Report Share Posted February 5, 2009 No, I don't think you are wrong. The situation here is that the second unit has to be placed into service at the lower of cost or FMV when placed into service. The FMV not only dropped, but the ratio of non-depreciable land to total value significantly increased further decreasing the amount of depreciation available to the client. The appraised value very closely approximates the FMV here because all the reappraisals were done using recent sales in the neighborhood within the month of appraisal. Due to the decline in the economy, the values dropped. I just don't get why the land value appreciated so much but the overall value declined. The auditor's office just said they used a different appraisal firm. Quote Link to comment Share on other sites More sharing options...
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