This is a property on over 2 acres. I'd like to buy it, split the property and rent out the existing house. Then build myself a new house on the other portion of the property.
How would I determine the cost basis of the existing house (and the split portion of land, I guess)? I would be nice to maximize the "cost" of the rental property to maximize the depreciation/avoid additional capital gains on it when sold.
Thanks!
Location: Colorado, USA
The assessment will often give you the ratio to use for the land vs the house. e.g. if the assessment shows Building $100K, Land $25K, you assign 20% of the purchase price to land, and divide that among the two parcels, in proportion to their size.
You get a licensed appraiser to provide you an appraisal for each part of the property. You then calculate the ratio, and use it to apply to your original cost basis. The result is the cost basis you can use for tax purposes.
In most tax jurisdictions you cannot deduct/depreciate land, only the improvements, so you need the appraiser to include the split between the improvement and the land.
Using assessment information (from the property tax) for the land/improvement split is also possible, but not every municipality has that. Check yours. Also, they're not really precise and if it is too much in your favor, the tax agency may challenge that.
