Discussion:Depreciation of Condo under IRS audit
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Discussion Forum Index --> Tax Questions --> Depreciation of Condo under IRS audit
UPDATE AT END!
2 July 2010 | |
| I have a client who purchased a condo in San Franciso for over a $1M. We are under audit right now and the auditor is questioning my allocation of 75% building and 25% land because I did not follow the tax assessor allocation which was more like 80% land and 20% building(which I don't agree is reasonable). I was under the impression that any reasonable allocation would be valid, but can not find anything to substantiate this. Has anyone succussfully won this argument? | |
| 2 July 2010 | |
| I suppose the auditor's point is that your allocation of 75% to the structure is not reasonable when the local taxing authority says it should be 20%. Somehow, someway, you need to find support for your allocation. You might want to start with the firm that handled your client's appraisal when the unit was purchased - see if they can provide a land/structure breakout. Is this a big building with several units? | |
| 2 July 2010 | |
| The tax assessor's allocation of land and building are not necessarily determinative of the proper allocation. In its own letter ruling (PLR 9110001), the IRS ruled that a taxpayer may NOT allocate its cost basis of land and building solely according to the assessed values of the land and buildings for real estate tax purposes if a better means is available. However, as Ckenefick correctly pointed out, you must have some evidence to support your allocation. Unless your client has already done so, I suggest obtaining an appraisal. | |
| 2 July 2010 | |
| I ran into this issue at audit - the percentages were about the same as in Jimbocpa's case.
We did get an appraisal and ended up compromising at around 50/50. The appraisal issues were really interesting in that you could argue that the land was absolutely worthless without a building on it, except perhaps as a parking lot or farmland! The appraiser was able to increase the appraised value of the building by analyzing the special construction that had been needed to accommodate a dental practice. | |
| 2 July 2010 | |
| Very reasonable responses. Good advice as usual from the Board. | |
| 2 July 2010 | |
| I'm also wondering if the condo development was recently constructed from the ground up. If so, and the developer purchased the land separately in the recent past, I'm wondering how much he paid for it. | |
Death&Taxes (talk|edits) said: | 2 July 2010 |
| And perhaps the tax assessor is a follower of Henry George. I say this with a smile, but it is true that most assessment is guesswork and that there is a political tinge to it. | |
| 2 July 2010 | |
| I am not familiar with the property laws in California but in Colorado, the state defines a condo as the interior space. The Owners Association actually owns the land and exterior space. No land is involved with Condo ownership. How may condos are in the complex which occupy the land? Who hold title to the land? In Colorado, it is the Owners Association and you can verify that by looking at the property tax records. | |
| 2 July 2010 | |
| Right. And if the condo association owns the land, each unit owner is deemed to own his/her proportionate share of the land by virtue of his or her membership in the association. As a result, the more units the better, with respect to the land allocation. | |
| 2 July 2010 | |
| Exactly. But better yet. If the Owners' Association own the land and the common area property in title, the purchase of the condo is only related to the interior building structure.
I suggest you get a copy of the Owners' Association Declarations and review them to see how they specifically identify what is involved in the Condo ownership, look at the local property tax records to see how title is recorded and investigate California state law regarding condos. If the land was never purchased in the first place, how can you remove it from the purchase price? | |
| 2 July 2010 | |
| Your responses have been extemely helpful. We are dealing with a 40 story building comprised of I don't know how many individual units. I will get a copy of appraisal and check what the bank had said. Appreciate all of your feedback! | |
| 2 July 2010 | |
| I don't think this will fly. The land is indeed included in the purchase price. Even if the association owns the land, each condo purchaser would have to make an allocation to the land. Again, each association member is deemed to own his or her proportionate share of the land. | |
| 2 July 2010 | |
| FYI - My last comment was in response to Larry0434. I think Jimbocpa and I were responding at the same time. | |
| 2 July 2010 | |
| Just to confuse the conversation with factual information. In Colorado, the tax assessor does not assign any value to land in a condo project because the land is owned by the association. Land is assigned with a townhome project because land is a component of the purchase. Land is a component of a single building structure because it is a component of the purchase.
Again, I suggest reviewing the state law, condo decs, and property tax assessor to see how they handle this issue. | |
| 2 July 2010 | |
| Right. But either way, there's an allocation that has to go to the land - even in a 1,000 story high-rise. | |
| 2 July 2010 | |
| Doing the referee/umpire thing here:
Chris is assuming that the association is owned by the condo owners (which is typical), meaning that a percentage of the purchase price for the condo is allocated to the condo owner's share of the land owned by the association. Larry is explaining that in his state, the association may well be separately owned, in which case it would not be appropriate to allocate part of the land owned by somebody else when determining the condo owner's depreciable basis.
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Southparkcpa (talk|edits) said: | 3 July 2010 |
| Out of curiosity... What effect did the depreciation have? I would assume that some PAL came into play? What is the exposure? | |
| 3 July 2010 | |
| Gotcha Trillium. I just didn't see where Larry was implying that the HOA may be owned by an outside third party. I took his comments to mean that since the HOA owns the land, that's the end of the investigation and as a result, there would not be any allocation to the land. | |
| 3 July 2010 | |
| In California the amount reported on the property tax bill for land and improvements (building) is very arbitrary because it has no significance in the actual calculation of property taxes. This is because the basic tax computed is at 1% of purchase price. In fact on a resale the assessor uses the prior assessed improvement amount and subtracts this amount from the total purchase price to obtain the land value. This procedure is established by the Board of Equalization. No consideration is given to any improvements the prior owner might have made to building (flooring ,granite ,etc.) Also no consideration is given to general increases in building costs from year to year.
In addition to getting the appraisal you might want to request from the county assessor the history of the property tax bill for your unit. There is a term they use for this document but I can't recall offhand what it is. You have a right to this and it may be beneficial in the negotiation process with IRS. | |
| 7 July 2010 | |
| The client is able to deduct the loss on the rental property because his AGI is less than $125K. However, the end result for the change is zero beause there is no taxable income and AMT is involved. I'm fighting this more out of principle if anything because the auditor seems pressed to get some sort of change despite having looked at every single number and not coming up with anything else. I'll be honest, in practice, we would generally allocate 75% of a property purchase to building and 25% to land. A method that I'm sure a lot of you learned back in the Big 8 days. I've never been challenged on this until now so I'll let you know what happens when I hear from the auditor. | |
Southparkcpa (talk|edits) said: | 8 July 2010 |
| Jimbo
I am with you 100 percent. Tell the auditor you will compromise at 60-40 for the sake of moving forward. If he disagrees tell him that you want to take it first to his supervisor and then to appeals and that you are gonna drag his name through the mud at every opportunity as being unreasonable. I tried that once and it worked. I was bluffing on the appeal but it worked. Not much of a technical strategy but try it. | |
| 9 July 2010 | |
| Not sure if it matters, but if less than 30% of the unadjusted basis of the overall property is subject to depreciation, the gross income is treated as portfolio. Reg ยง 1.469-2T(c)(3)(i)(A). | |
2 September 2010 | |
| Final update as I just heard from the auditor and thought I would share the NO CHANGE result. I argued based on PLR 9110001 that our 25% allocation for land was reasonable based on the grounds that the SF tax assessors 60% allocation to land on a condo was unreasonable because of the number of units in the tower, their actual ownership based on units was a very small % and that the property tax bill prior to the re-assessment showed a 14% allocation to land. Threw in the fact that we were dealing with a timing issue and threatened to invoke a cost segregation study to depreciate improvements faster. We succeeded. I was prepared to go to the supervisor and the manager, and believe that they may have intervened and just closed the case. Thanks for all your input!! | |
