Depreciation (How to assign values to land vs. improvements)?

I purchase a 100% fee-interest in a 40,000 SF office building for $10M. The total land size is 1 acre. I need to split out land value vs. improvements value for tax/depreciation purposes.
Land + Improvements + Personal Property needs to total $10M for Year 1, correct?
Assume zero for personal property. I look at comparable land sales in the market, and find that on average, they sold for $3M per acre. That leaves $7M for the improvements, over 40,000 SF that equals $175 per foot. But let's say the building is relatively new, and the developer spent $300 psf building it. So my question is, as an owner, it would be better for me to assign a higher value to the improvements so I can have a larger deduction, or am I missing something? I guess I am trying to figure out how land vs. improvements are valued for tax purposes.
In Buying Property - Asked by Eric G. - Jul 30, 2009
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Mike F.
Atlanta, GA

A real quick way to benchmark the value of the improvements as a percentage of the total property value is to look at the tax assessment which is usually broken down into improved value and land value.

Jul 30, 2009
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Eric G.
Corporate Investor
Beverly Hills, CA

Thanks Mike.
So in a state where taxes are reassessed upon a sale:
The 2008 tax bill shows total assessed value = $10M, $4M land, $6M improvements.
So a 60/40 ratio, improvements to land.
I buy the property for $15M, so new assessed value is based on the $15M, for example. Should I still use the 60/40 ratio to split out the land value vs improvements?

Jul 30, 2009
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Davide P.
Pinole, CA

If you purchase the property for $15M, yes you can apply the 60/40 ratio with nearly no problem. However, if you feel the improvement is valued HIGHER than 60%, you can conduct an appraisal and make your case with the tax assessor to see if they will raise it higher. The appraisal won't be cheap, but it could be worth the effort. I would recommend contacting the tax assessor and ask him/her what steps are necessary to apply for the change.

Jul 31, 2009
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Chris S.
Coeur D'alene, ID

Previous answers were correct. I would use the assessor's estimates as a good place to start. If you move forward with the purchase it could be in your best interest to take a look at cost segregation to make sure you are getting the most out of your depreciation.

Aug 3, 2009
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Gregory G.
San Francisco, CA


Aug 14, 2009
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