Depreciating a Condo, Land vs. Improvements


Old 04-04-19, 08:37 PM
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Join Date: Dec 2014
Location: USA
Posts: 154
Depreciating a Condo, Land vs. Improvements

Hi All,

We used to live in a 2-floor townhouse/condo from 2006 - 2011. In 2011, we moved and converted the condo into a rental unit.

The condominium association itself has something like 15 buildings. Each building is three stories high, with the first floor being a 1-floor unit, and the second and third floors being the 2-floor townhouse units. Each unit has its own outdoor entrance. There are a total of about 20 units in each building, so about 10 ground floor units and about 10 2-floor townhouses. The townhouses do not sit on the land at all, as they sit on top of the ground floor units.

For tax purposes in 2011, our CPA uses the then-fair market value (FMV) as our basis for depreciation purposes (this was lower than our cost + improvements - deductions, etc.). However, he depreciated 100% of the FMV. I'm wondering if he should have depreciated only a percentage of the FMV because land cannot be depreciated. According to the town tax bill, about 60% of the assessed value is "land" and about 40% of the assessed value is "improvements."

Should our depreciation really be calculated as FMV * 0.4 / 27.5 years? Or is it just FMV / 27.5 years?

I've read several places that a condo like ours is considered an "air-lot" and that I don't actually own any of the land (because its owned by the condo association), meaning that I depreciate the full FMV. I've read the opposite in other places. The first one makes the most sense to me for common sense purposes - I'm not actually on land, I'm on top of another unit; and the FMV of my unit includes the opportunity to enjoy the other condo land (e.g., the pool, tennis courts, etc.), with the actual land being owned by the condo - I can't do anything to this land like I could if it was a single home.

Any thoughts on whether my CPA messed up or not? If he did, then that means I've been taking a bit more than 2x the depreciation I should otherwise have taken. Which would mean I would actually owe taxes!


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