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January 23, 2024

Calculating the Land and Building Value of Your Rental Property

Calculating land basis is an important step often overlooked by new landlords or CPAs who don’t know what they are doing.

When you buy a building, you buy the structure and the land beneath it. You must allocate value to both the land and the building. You do this by dividing up your purchase price between the land and the building.

If you do not divide the value between land and building, but instead accidentally allocate 100% of the purchase price to the building, you will effectively be depreciating the land. This is a problem because land cannot be depreciated.

The easiest method to allocate the purchase price between the land and the building is to find the property tax card for the building. You can do this by visiting the local property assessor’s website or office.

The tax card will give you a value for the land and a value for the building. You will take those percentages and apply them to your purchase price.

For example, you purchase a property for $100,000. You pull the property tax card and see that the county values the land at $5,000 and the building at $45,000. You would, therefore, apply a 10% ratio to the land and a 90% ratio to the building, or $10,000 to land and $90,000 to the building based on your purchase price.

This method, while easiest, does not always grant the best results. In places like San Francisco or Washington, D.C., the land value per the property tax card can often exceed 50%!

Other methods to explore are looking at the appraised value from the qualified appraisal you may have received. Sometimes the appraiser will break out the land value. You may also look at the replacement value on your insurance quote or have a real estate broker run a CMA (competitive market analysis) showing the value of vacant lots of similar size and location to your property.

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