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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

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    First research the zoning regulations for that area. Some jurisdictions set minimum lot sizes, and rules specifying how close to an edge the property can be. The plat may also specify ares you aren't allowed to build to do easements and the like. Do all this research and planning before buying the property. Apr 29 '15 at 15:38
  • Welcome to the site. Questions about tax require that you specify a country. We use tags for that purpose. Please click edit and tag accordingly. Thanks. Apr 29 '15 at 15:39
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    Unless the property already consists of two (or more) parcels/lots that have their property tax ID etc., one cannot (in many US jurisdictions; Colorado might march to the beat of a different drummer) buy a two-acre area, split it into two parts, and sell off one part. If nothing else, a surveyor's map delineating the boundaries of the sub-lots will need to be filed at the OP's expense. Apr 30 '15 at 2:48
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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.

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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.

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    The assessed value doesn't always reflect reality, nor does it need to. But if it has a land/house split, that ratio should be good. IRS should accept a town assessor's split over an appraiser's. (In my opinion) Apr 29 '15 at 19:06

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