Understanding Land Value and Building Improvements

Unlocking the Power of Cost Segregation:

Understanding Land Value and Building Improvements

     When doing a cost segregation study, one key step for defensibility of the study is to distinguish between land value and the improvements, which is the building. Land value cannot be depreciated and thus the real benefit for you, as a real estate owner, lies in accelerating the depreciation of the improvements. You may ask: How do I accurately determine the land value of my property? This crucial step is where many property owners seek clarity.

Determining Land Value

Accurately determining land value is key for study’s defensibility. Some widely used ways to determine the land value are:

• Appraisal Method
• Independent Appraisal (Sometimes called Replacement Value or Construction Value): The IRS often relies on a professional appraisal to determine the land's value. A qualified appraiser assesses the fair market value of the land and improvements separately.
• Cost Approach: This approach estimates the value of the land by subtracting the depreciated value of the improvements from the total property value.
• Sales Comparison Approach: The appraiser compares the subject property with similar properties that have recently sold, isolating the value attributable to the land. 
• Tax Assessment Records
• Local Tax Assessor’s Data: The IRS may use the land value recorded in local property tax assessments. This method assumes the tax assessor has already separated the land and improvement values.
• Allocation Method
• Residual Method: This method involves subtracting the cost of improvements (buildings, infrastructure) from the total purchase price to estimate the land value.
• Ratio Method: If the property was recently purchased, a common method is to use the ratio of land value to total value as reflected in the purchase documents, if this information is broken down.

IRS Emphases Analysis of Land Value

Land value analysis has become a focal point for many auditors. The IRS has consistently emphasized correct determination of land value in its audit technique guides, underscoring the importance of using their preferred method. By adhering to these guidelines, you and your CPA can confidently determine your property’s depreciable basis and fully leverage depreciation deductions.

Why It Matters

Adopting the IRS’s preferred methods for accurate land value determination not only ensures compliance with the IRS rules but also maximizes your depreciation benefits.

Properly segregating costs and understanding the distinct values of land and improvements sets the stage for significant tax savings without any additional risk of defensibility of the study. This approach transforms your property investment strategy, enhancing cash flow and accelerating returns.

Recognizing the importance of accurately determining land value is essential in a cost segregation study. By utilizing reliable resources and adhering to IRS guidelines, you can confidently navigate the process and unlock the full potential of depreciation deductions.

Reach out to consult with our experts on how to have your study maximize your benefits while being fully defensible.