DEAR BOB: I own rental properties in Las Vegas and have been calculating my depreciation tax expense by using the property tax assessor’s tax ratio between land and building value. My problem is that the depreciable building value is very low at only 36 percent to 50 percent. I think I should be taking a bigger depreciation write-off. I’ve heard of investors using an 80-to-20-percent ratio of building to land. What should I use? –Julie T.
DEAR JULIE: The exact answer depends on the type of property. For example, if you own a rental condominium, your building-to-land ratio will probably be about 98 percent to 2 percent.
Purchase Bob Bruss reports online.
The local property tax assessor’s ratio of building to land means nothing. He still gets the same market value and property tax no matter what the ratio. All that matters to him is the total property value for tax assessment purposes.
When the IRS audited me on this issue several years ago, I showed the IRS agent my property insurance agent’s replacement-cost estimate for the structures. The IRS readily accepted the insured replacement cost for allocating depreciation, with the remainder of my property purchase cost going to the nondepreciable land value.
Since then, I have talked with tax advisers and other investors who use the same method of taking the insurance replacement cost to justifiably arrive at the depreciable value of the structure. For more details, please consult your tax adviser.
HOW TO MAKE PURCHASE-OFFER CONTINGENCIES ACCEPTABLE
DEAR BOB: I am a real estate agent about to make a purchase offer on a property with a contingency. Please outline how to make this appealing to the property seller –Dede C.
DEAR DEDE: You ask a difficult question. In the current buyer’s market for homes in most cities, most home sellers are glad to receive any purchase offer.
If the seller doesn’t accept your buyer’s offer, be sure the seller counteroffers to keep negotiations moving. Don’t leave until you have a written counteroffer.
Make the contingency clause reasonable, such as a contingency for the buyer’s approval of a professional inspector’s report within five business days. Provide a similar reasonable time for a mortgage appraisal within a short time. In most cities, inspectors and appraisals aren’t too busy to meet short deadlines today.
However, if the contingency clause involves the sale of the buyer’s current home, show the seller the home is currently listed for sale with a reputable local realty agent. Include a 48-hour release clause in the purchase offer in case the seller receives a better no-contingency purchase offer from another buyer.
AVOID LANDLORD LIABILITY WITH ADEQUATE INSURANCE
DEAR BOB: I own a rental condo in Tampa, Fla. It is currently rented on a one-year lease. I live out of state. What is the best way to protect myself from liability in the event of an accident on the property? I have considered transferring title to a LLC (limited liability company). But I am concerned that will require special insurance and additional transfer costs. Would buying additional liability insurance be better? – Jeff M.
DEAR JEFF: Be sure you have adequate rental owner’s liability insurance for at least $300,000. If your net worth exceeds $1 million, ask your insurance agent about an excess liability umbrella policy for $2 million or $3 million. The cost is very cheap, usually just a few hundred dollars per year.
However, be sure your basic rental owner’s insurance and the umbrella policy are with the same insurer so there is no conflict between insurers if a large negligence liability loss occurs in your condo. Also, your umbrella liability policy will protect you against other losses, such as your negligence in a serious auto accident.
The new Robert Bruss special report, “How to Sell Your House or Condo for Top Dollar in a Buyer’s Market,” is now available for $5 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant Internet delivery at www.BobBruss.com. Questions for this column are welcome at either address.
(For more information on Bob Bruss publications, visit his
Real Estate Center).