Calculation Of Depreciation
For distressed property, I assume the calculation of the depreciation allowance is based on the basis of the property. For instance, the county calculates an assessed value of $120,500 as:
Land Value Assessed $31,500
Bldg. Value Assessed $89,000
If the total basis (purchase price and capitalized cost) of the distressed property is $60,250 (I made the numbers half for simplicity,) does it follow that the company books would show:
Land Value Assessed $15,750
Bldg. Value Assessed $44,500
and therefore the annual depreciation allowance would be $44,500 / 27.5 or $1618? Seems like a reasonable conclusion.
Now a twist. What if the distressed property is repaired and is refinanced at 75% of appraised value of $120,500. Does it follow that the "new" building is really now worth $89,000 and depreciation can be claimed at the total basis of $60,250?
Any clarification or references on this are appreciated.
Quote:
On 2009-12-16 16:08, ITBInvestor wrote:
For distressed property, I assume the calculation of the depreciation allowance is based on the basis of the property. For instance, the county calculates an assessed value of $120,500 as:
Land Value Assessed $31,500
Bldg. Value Assessed $89,000
If the total basis (purchase price and capitalized cost) of the distressed property is $60,250 (I made the numbers half for simplicity,) does it follow that the company books would show:
Land Value Assessed $15,750
Bldg. Value Assessed $44,500
and therefore the annual depreciation allowance would be $44,500 / 27.5 or $1618? Seems like a reasonable conclusion.
Yes, based upon your numbers it does make sense to allocate $44500 of the purchase price to the depreciable improvments. Your calculation makes sense and is defendable to the IRS.
Quote:Now a twist. What if the distressed property is repaired and is refinanced at 75% of appraised value of $120,500. Does it follow that the "new" building is really now worth $89,000 and depreciation can be claimed at the total basis of $60,250?
Repairs are expensed, not capitalized. If the property is simply "repaired", then there is no change in the depreciation basis. Refinancing is not a factor. In fact, the presence or absence of any financing has no bearing on the question.
If what you call repairs is really a capital improvement, then the improvement itself is a separate depreciable asset with a 27.5 year recovery schedule for the actual cost of the improvement. Whatever the property might appraise for after the improvement is also irrelevant to the depreciation basis calculations.
This was unintelligible SO am re-posting..
(source http://www.groco.com/readingroom/invest_qsbs.aspx)
QSBS: An Opportunity for Investors?
About a decade ago, aiming to give a boost to developing small businesses, Congress granted an unusual tax break, allowing taxpayers who buy newly issued shares of qualified small business stock (QSBS) and hold it for five years to exclude from taxation half of their capital gain realized on the eventual sale.*
Sounds like a wonderful opportunity? Yes, but, as so often with tax legislation, it has its limitations.
Business limitations
First of all, not all small business stock qualified. The business issuing the stock had to be a domestic C corporation with no more than $50 million in assets at the time that the qualifying stock was issued. It had to have at least 80% of those assets in use in the active conduct of its business. And an extensive list of business types was excluded:
• Businesses that performed services in health, law, engineering, architecture, accounting, performing arts, consulting, athletics, financial services or brokerage.
• Businesses that have as their principal asset the reputation or skill of one or more employees.
• Any banking, insurance, financing, leasing, investing or similar business.
• Farming, mining or petroleum production.
• Hotels, motels, restaurants and similar businesses.
Nonetheless, many small businesses do qualify
This seems c-corp from a less entity type top being more desirable.
Be aware that there are a few special circumstances for REI, specifically real estate dealers and depreciation recapture of amounts you claimed or could have claimed. See also http://www.irs.gov/publications/p537/ar02.html