Insurance Good Way to Set Duplex Value

QUESTION: We are buying a two-family duplex which we will rent to family members. But we forgot to allocate in the purchase contract the amount we are paying for the land and for the building. Is it important to go back and renegotiate?

ANSWER: No. The duplex seller doesn’t care how much of the purchase price is paid for the land or for the building. After purchase you and your tax adviser can make an allocation of your purchase price, for depreciation tax purposes.

One way is to use the local tax assessor’s land-to-building ratio. But most of these ratios are inaccurate or unfavorable to the property owner. Frankly, the assessor doesn’t care what the ratio is.

A better method is to use your insurance agent’s estimate of the building’s replacement cost. If you insure the building for this amount, the balance of your purchase price must be the land value.

Tax Records Offer True Picture

Q: We want to buy an apartment building, so our relatives can live in the same property with us. But we need to know what the true expenses are before we buy. What is the best way to check out the current expenses and rental income?

A: Ask the apartment building seller for a copy of Schedule E of their federal income tax return. I’ve never met an income property owner who overstates the rental income or understates the expenses on their tax returns.