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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 29800
Experience:  Taxes, Immigration, Labor Relations
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I have a client that bought a 4 family rental property in 2010.

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I have a client that bought a 4 family rental property in 2010. How do we breakout land and building values and what depreciation method do we use for the building and closing costs

LEV :

Hi and welcome back!

Customer:

how are you

LEV :

Part of closing costs might be deducted - mortgage interest, real estate taxes. Not deductible part of closing costs is simply added to the purchase price and that will be the basis.


What we usually do to prorate land and improvement costs - take a tax assessment and divide the purchase price with the same proportion.


Example. You buy a house and land for $200,000. The purchase contract does not specify how much of the purchase price is for the house and how much is for the land.


The latest real estate tax assessment on the property was based on an assessed value of $160,000, of which $136,000 was for the house and $24,000 was for the land.


You can allocate 85% ($136,000 ÷ $160,000) of the purchase price to the house and 15% ($24,000 ÷ $160,000) of the purchase price to the land.


Your basis in the house is $170,000 (85% of $200,000) and your basis in the land is $30,000 (15% of $200,000).


You cannot depreciate the cost of land because land generally does not wear out, become obsolete, or get used up.


The residential rental property is depreciable. Generally, you must use the Modified Accelerated Cost Recovery System (MACRS). MACRS Recovery Period for the residential rental property (buildings or structures) and structural components such as furnaces, waterpipes, venting, etc. under General Depreciation System is 27.5 years.


You place property in service in a rental activity when it is ready and available for a specific use in that activity. Even if you are not using the property, it is in service when it is ready and available for its specific use.

Customer:

are the closing costs amortized over 60 months

Customer:

would you use msl 27.5 years

LEV :

Closing costs that are not deducted in the year of sale - are added to the basis and depreciated as part of the property. Part of closing costs related to a mortgage are amortized over the life of mortgage.

Customer:

would you use 27.5 using modified straight line for the building

LEV :

yes - that is correct.

Customer:

thanks so much

Customer:

what code number is XXXXX costs is it 197

LEV :

I am not clear with your question...

Customer:

Dont worry thanks again

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