Don't Let a Simple Land Allocation Mistake Shrink Your Deductions
·3 min 26 sec
How does land allocation affect a cost segregation study?
Land is not depreciable, so it has to be separated from the total purchase price to establish the building basis, and that basis is what gets segmented into 5-year, 15-year and 39-year property. The higher the land allocation, the lower the building basis, and the lower the yield in accelerated depreciation. The most common investor mistake is treating land allocation as a fixed dollar amount from an appraisal or tax record. It is a percentage of total property value at the time of purchase, sourced from county tax assessor records, a property appraisal, or your CPA's methodology.
What if a simple misunderstanding could cost you thousands in missed tax deductions? Carlos from US Tax Advisors Group dives into one of the most critical -and often misunderstood- foundations of a cost segregation study: Land Allocation.
Since land is non-depreciable, it must be accurately separated from your building's total purchase price to establish your "building basis." This basis is what gets segmented into 5-year, 15-year, and 39-year property.
"The higher the land allocation, the lower your building basis. The lower your building basis, the lower your yield in accelerated depreciation."
The #1 Mistake Investors make is assuming land allocation is a fixed dollar amount from an appraisal or tax record. It's not. It's a percentage of the total property value at the time of purchase.
And How Can You Find Your Land Allocation? This value must come from you or your CPA, using:
County Tax Assessor Records (using the percentage method)
Property Appraisals (look for the "Cost Approach" and "Site Value")
Your CPA's recommended methodology
Important Note: If the property is already in service and depreciating, the land allocation should already be established on your existing depreciation schedule.
Don't Let a Foundation Error Weaken Your Tax Strategy.
An accurate cost segregation study is built on precise data. Ensuring your land allocation is calculated correctly is the essential first step to maximizing your cash flow.
Full transcript
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0:02Hey, what's going on everyone? I am Carlos with US Tax Advisors Group and today I'm going to talk to you about land allocation. Land allocation is extremely, extremely important because we have to, you know, since land is non-depreciable, we have to remove land out of the equation whenever we're trying to arrive to what the building basis is, whenever we're trying to peel the onion to know what it is that we're going to be working with.
0:25The higher the land allocation, the lower your building basis. The lower your building basis, the lower the yield, the lower the five and 15 year property that you get to depreciate. So it is very, very important for you to have the correct land allocation from the get go. We at US Tax Advisors Group, we are not land appraisers. We do not provide land allocation. So this is something that has to come from you and or from your CPA.
0:55You can use county tax assessor records as a reference. you can use appraisals. Sometimes if there's the cost approach within the appraisal that many cases, the lenders will not require it. Therefore, the appraiser will not include it. But if the cost approach is there, you should have a, it's under the cost approach. It's called site value. That's the land allocation. In relationship with the total value, that's very key.
1:22And then there's other ways that you can come up with the land allocation. But talk to your CPA about this. One thing that I do want to say is when looking at county tax assessor records, we're looking at an appraisal, land allocation is not a number, it's a percentage. So let's say that you bought a property for $400,000 and you bought the property for $400,000, you got a great deal on that property, you're looking on the tax assessor records and it says the land allocation is $100,000. That is correct, but it's also incorrect because the land allocation per the county tax assessor records is $100,000, but in relationship with the total assess value. If the total assess value is $500,000, then land allocation is really 20%. So then we take your $400,000 purchase price times 20%, and you had originally given me $100,000 because you went off of the exact number that was there on the county tax assessor records, but it's 100,000 in relationship to the total value.
2:25So therefore, that 20%, it's not 100,000, it's 80,000. So that is how land allocation works. Same thing when using an appraisal, it's the side value in relationship with the total value. Oh yeah, I bought it for 550 and the appraisal came in 650 and the land is 300,000. Yeah, but it's 300,000 in relationship to that 650. So again, talk to your CPA. There's different ways that you can come up with the land allocation. If it's a property that you've already had in service, that's been in service for a few years.
3:00There's already a depreciation schedule. So there's really no need for you to go back to try and figure out the land allocation because it's always going to be there under the depreciation schedule. But if it's a property that you're just going to place in service, make sure that you talk to your CPA. There's different ways that you can come up with the land allocation, but it is very important and we do not give you the land allocation.
3:21So that's for that, see you guys next time.
