Rental Condo subject to ground rent: is entire purchase price depreciable?

If you don't own any land, then the purchase price can't be allocated between land and building. Therefore, your cost basis for depreciation is what you paid.

Assuming we are dealing with nonredeemable ground rent, you can deduct the expense as Rent on your Schedule E.

My guess is that ownership of the condo includes membership in the HOA, which is the owner of the land and everything other than the condos per se, rather than OP paying rent for the land the condo occupies.

I've seen a couple of examples like this, where a condo was located on a long term ground lease. But neither were "rentals" so I didn't have to address the depreciation ramifications.

It seems to me that part of what you have purchased is the "right" to occupy the land on a long term basis, and that right is susceptible to valuation. And, presumably, whatever value was allocated to that would not be depreciable or amortizable.

I also note, in the examples I've seen, that the county assessor treated the condo owners as the "owners" of the land for property tax purposes. So each owner's property tax statement included an assessment for "land" and "building," just like it would if the condo owners actually owned the land.

So, without further research, if the latter was the case with respect to local property taxes, I would treat the condo purchase price likewise. That is, I would allocate it between land and building values, and the land portion would be nondepreciable.

MTW

If it's a lease, then the lease payments are deductible. If it's a lump sum payment up front for a lease of a number of years, it should be depreciable over that number of years.

It may be different in Delaware, but in California all the condos I've seen include an indirect (though membership in the HOA) ownership interest in the land and common areas.

That may be a pro forma calculation unrelated to actual values or conditions. If it's not, it may be reasonable to use those figures.

My original reply was based on this being nonredeemable ground rent. Here is how I think this works.

First there is no right to occupy the land in the purchase price. That right is in the lease for the land. Therefore, there is no allocation to land of the purchase price.

The ground rent is either going to be redeemable or nonredeemable. If nonredeemable, then the payments are rent. Rent is deductible on Schedule E for business property and not deductible if personal use property. If the ground rent is redeemable, then the property is considered to be subject to a liability (a mortgage) and the rent is deductible as mortgage interest. Personal use interest goes on Schedule A. Business use interest goes on Schedule E. Lastly, if it is redeemable ground rent, then there is a leasehold interest in the land. The capitalized value of that interest is an INCREASE to the basis of the property. As that basis relates to land.... it is not included in the cost basis for depreciation.

Alan -

I agree with your comments on redeemable and nonredeemable ground rents. But I believe the question of whether the original purchase price needs to be allocated is one of "facts and circumstances."

Consider the following example: A friend of mine recently purchased a small mobile home in a trailer park located in a popular beach community. The price he paid was probably 2.5 - 3 times the FMV of the trailer itself. No land included, but it did include the implied right to occupy the ground rent lot (nonredeemable) on an indefinite basis.

Now, why would someone pay such an "exorbitant" price? Because of the three magic words of real estate: location, location, location. :-)

So it seems to me he has actually purchased TWO things. One is the trailer itself, the other is the right to occupy the lot. His purchase was for personal purposes, so we don't have to worry about depreciation. But if this had been a purchase for business or rental purposes, I believe the maximum amount of the purchase price that could be depreciated would be the FMV of the trailer.

The excess of the price paid over that would, I believe, be allocated to some kind of an intangible asset (I call it "land", but if you don't like that, call it something else). Whether that intangible could be amortized for tax purposes would be a question for research. But it seems to me a pretty good argument could be made that it has an "indeterminate" life (regardless of any terms in the ground lease itself, since the expectation of all parties is that it will be renewed endlessly) and therefore would simply be a non amortizable capitalized cost.

So, back to our original question, can you depreciate 100% of the price paid for a condo just because no land is officially included in the price??? I don't think it's that easy. :-)

MTW

I believe it is simple for the OP. He said the condo was in the State of DE and involved the payment of ground rent. As such, there will be a lease agreement for his use of the land. No allocation of his purchase price need be made to the land or any other intangible asset.

As to your hypothetical, I am not aware of anything in the IRC that requires an owner of "real property" to allocate a part of cost basis to land not owned or to any intangible asset unless some part of the purchase contract created a leasehold interest in the land.