By Gian P. Pazzia, Lester Cook

A recent Tax Court opinion favored a Los Angeles County tax assessor's valuation of rental property improvements over the property owner's own appraisal.

On May 8, 2017, the U.S. Tax Court released Summary Opinion 2017-31, in the case of Nielsen v. Commissioner, concluding that the county assessor's allocation to land and improvement values were more reliable than the taxpayer's proposed values. The Tax Court noted it could not find any authority that suggests a taxpayer is qualified to allocate the value of property between land and improvements.

The taxpayer contended the county assessor's data was “extraordinarily inaccurate," but the Tax Court did not agree. While the Tax Court acknowledged a taxpayer is qualified to testify as to the value of their entire property, it found no authority suggesting a taxpayer is qualified to allocate the value of property between land and improvements.

When land and a building are purchased for one price, the case highlights the importance of substantiating the values used for tax depreciation purposes.

In many cases, a real estate appraisal is performed for financing purposes but does not include a value for land. In these instances, where the purchase price is significant, it may be prudent to contact the same appraiser to commission a land appraisal. For income tax purposes, every dollar shifted from land value to improvement value yields permanent tax benefits.

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