An independent land value can come in below the figure your CPA is using now, near it, or above it. I say that before anyone orders anything. An appraisal that could only move the number one way would not be worth handing to your CPA.
If you bought the property as a rental, you already know what you paid. Your CPA needs to know how much of it was land and how much was building, because the building can be depreciated and the land never can. The same split comes up when a former home becomes a rental, when an inherited house does, and when the study happens years after the purchase. In any of those cases, when your CPA wants market evidence for the split, a land allocation appraisal is what supplies it.
What a land allocation appraisal does in a cost segregation study
A cost segregation study sorts the property into asset classes for tax purposes: the building, land improvements, and personal property. The study provider does that work, and your CPA decides the tax treatment. My part is the real estate: the site value, supported by lot and teardown sales, and how it relates to the whole property’s value, as of the date your CPA needs. We settle at engagement how the whole-property value gets supported.
The IRS publishes a guide for its own examiners on these studies, the Cost Segregation Audit Technique Guide. One of the things it tells them to check is whether the value opinions came from a competent and qualified appraiser. It is a guide for IRS staff, not a promise about how any particular report will be treated.
Where the land number you have now came from
If your preliminary estimate took its land figure from the county assessor, that is allowed. IRS Publication 527 says to divide what you paid between land and buildings by their fair market values at the time you buy. If you are not certain of those values, you can use the split from the assessed values for real estate tax.
The assessor’s split comes out of mass appraisal, a model built to set tax bills across a whole county, as of the assessor’s valuation date rather than your closing. A land allocation appraisal replaces that model with sales evidence for one lot on one date. Whether you need that is your CPA’s call.
A land share that looks high is a reason to look at the evidence, and nothing more.
Valuing the site as if vacant
The house is still standing. The question is what the site would sell for without it. The IRS guide says the same thing in its own words: land value rests on the highest and best use of the land as though vacant, even when there are improvements on it.
In Denver, zoning is where I start. Some neighborhoods carry zoning that allows row houses or a duplex on a lot that holds one house today, and buyers pay for what the lot can become. Size, shape, alley access, and location count too. Two lots the same size can sell far apart.
Lot sales and teardown sales
I start with vacant lot sales near the property. Established neighborhoods have few of them, so teardown sales carry much of the load: houses bought for the land by a buyer who planned to tear down and build.
A teardown has to be checked before it counts. I find out what the buyer actually got, whether the old house added anything or cost money to remove, and what the zoning allows on that site. The IRS guide covers this case too. Land value can equal the value of the whole property when the improvements contribute nothing.
A sale six blocks away under the same zoning can tell me more than one next door under different zoning. The report shows which sales I used, why, and how I handled the differences. A list of nearby addresses is not an analysis.
From land value to the split
Publication 527 describes a ratio. The land’s fair market value over the whole property’s fair market value, at the time you buy, applied to your basis, which for a purchase starts with what you paid. So a land allocation appraisal sets the land value against the whole property’s value, and the improvements carry the difference. When the price you paid and the market value are not the same number, the ratio is what keeps the split honest.
Closing costs, what goes into your basis, and the final numbers on your return belong to your CPA. I supply the values.
Which date the appraisal uses
Confirm the date with your CPA before you order a land allocation appraisal.
If you bought the property as a rental, Publication 527 ties the split to the time you buy, so the date is your purchase. If that date has passed, even by a few weeks, the report is a retrospective appraisal: a value as of a past date, not the day I write it. If the study is being done years after you bought, the date is still the purchase, and the appraisal looks back that many years.
If you lived in the house first and rented it later, the date moves. The IRS sets the basis for depreciation at the lesser of fair market value or adjusted basis on the date it became a rental, so your CPA will want the value as of that conversion. An inherited house starts from its value at the date of death, or on the alternate valuation date if the estate elected it. The stepped-up basis post covers both.
Tell me what you changed after closing. A kitchen you redid after the purchase should not end up in a value dated before it.
Does it take a walkthrough?
Sometimes. If you have a recent appraisal from the purchase with interior photos and a full description, a land allocation appraisal can rely on it for the house and put the work into the land. I read the earlier report before I rely on it. Anything I take from it without verifying goes in my report as an extraordinary assumption: the analysis assumes that information is accurate, and the conclusions could change if it is not.
Other properties need a walkthrough. Send the existing report and I will tell you which kind yours is.
What to send for a land allocation appraisal
Your CPA’s written request and the address come first. Then:
- The purchase contract and settlement statement, or, for a converted or inherited house, the date it became a rental or the date of death
- The preliminary cost segregation estimate, or the page showing how its land figure was derived
- A list of anything you changed after closing
Tell me who else will rely on the report. If your CPA or the cost segregation provider needs to be named as an intended user, that gets settled at engagement, before the work starts.
If you are still deciding whether you need an appraisal at all, when you need an appraisal covers that. If you are ready, send me the address and your CPA’s request. The land number will be whatever the sales support.
This is general information about how a valuation assignment gets built. It is not tax advice. Your CPA decides how the numbers are used.
Charles E. Volk, SRA, is a Colorado Certified Residential Appraiser with 24 years of residential experience across Denver Metro and Boulder County, and a member of the Board of Directors of the Colorado Chapter of the Appraisal Institute. VolkHaus Appraisals works directly with CPAs, estate attorneys, trust officers, fiduciaries, and private clients. Colin O’Connor, our Senior Appraiser and a Certified Residential Appraiser, handles assignments alongside him.