Re: its NOT unethical… - Posted by David Krulac
Posted by David Krulac on November 24, 2006 at 17:27:36:
I think we must agree to disagree.
There is not 1 value for a piece of land. There is FMV, there is asssessed value, there is the highest and best use value, there is the value with the structure removed value, etc. etc. etc.
Two apprasiers could come up with and often do, a different value for the entire property and likewise would probably come up with a different land/improvement split.
You need a rationale and justification if you are going to use a land /improvement split that is not as conventional as 20% to 80% or the assessment figures. You will need in an IRS audit to defend this action as well as every other action on your return.
Recently a house sold for $100,000 on the same street where a lot sold for $40,000. I would easily use this as justification for the land split. Two hands length transactions one improved, one vacant lot on the same street. Pretty compelling IMHO, even though its double the accepted 20%. I think its totally justified and black and white not gray.
Another example a older farm house on 2 acres sold for $150,000, the rest of the farm was divided into other 2 acre lots totally vacant. These vacant lots sold for $100,000. Ergo the farm house was worth $50,000 and the land under it was worth $100,000. Instead of the “standard” safe 20% land value the land value here could easily be substantiuated to be 66%.
There is not one correct answer here, is the point, under certain conditions, the land value could fluctuate up to 100% in the case of a tear down.
The opposite is true also. If you wanted to maximize your depreciation, within reason, good sence and ethics, the land value can be lower and the improved value increased.
An example of that would be a substandard size, zoning or location of a property. Say a lot is less than the minimium size now required and the house is destroyed. Some areas grandfather that non-conformity for only 6-12 months. If you don’t rebuild in that time, the lot becomes unbuildable.
Or lets say the house is in a flood zone and the law forbids rebuilding if more than 50% of the structure is destroyed. You have a flood damage of more than 50%, now you have an unbuildable lot. What is its value? I would agrue very low. The difference between a buildable lot and an unbuildable lot could be 80% to 90%, the way I see it. It could be setback requirement, it could be lot maximum coverage requirement or any other zoning requirement.
The bottom line is that for an indivdual property there is latitude under the law for different valuation splits between land and improvement. As long as you can justify the split that you apply you should be in good shape with the IRS. And if you have a legal, rational, and ethical justification for your actions the IRS can not hit you for fraud.