Is it better to have a high equipment valuation and lower building value, or vice versa?

Is it better to have a high equipment valuation and lower building value, or vice versa?

by Judith Herron, CPA | Oct 09, 2017

I am purchasing a commercial building and the equipment inside for $290,000. I need to split the equipment value from the building. Is it better to have a high equipment valuation and lower building value, or a lower equipment valuation and a higher building value? What benefits me the most?

Here’s the quick answer: Finding a fact-based method to determine market value is your best bet. If the purchase is being financed by a bank, it is likely they will insist on using an appraiser to determine the value of the real estate. If you are financing the purchase privately, it’s worthwhile to consider finding a licensed commercial real estate appraiser. I am assuming the second part of your question is related to a possible tax advantage, and it’s not obvious to me that there is one.

If your plan is to sell either piece at a profit, then their value when you purchased them will be used in tax calculations. This value is called your basis. The difference between your purchase price (the basis) and the sale price is taxable profit. You will pay tax on that portion of the transaction after a sale. If your profit is lower, your tax is lower. However, items that have a lower basis will have a higher profit, so your net tax is likely to be the same.

If you keep the assets and use them for commercial purposes, you will expense their cost on your tax return over the expected remaining life of each asset. There are several ways to approach this. You can treat the building as one asset, with a life of almost 40 years, or you can expense parts of the building that will have to be replaced (like the heating and cooling system) over shorter periods. Determining how to separate out the various parts of the building is a fair amount of work, so it may not be economical to do that. The equipment is likely to have a shorter life span. The speed with which you will expense those assets will be shorter – but so will be the time to use the equipment before you need to replace it.

This is a matter to discuss in detail with your CPA – or a reason to find one if you don’t use an accountant already. 
For more resources, check out PICPA’s Money & Life Tips, Ask a CPA, or CPA Locator.

Answered by: Judith Herron, CPA, is with Markovitz Dugan & Associates in Pittsburgh, Pa.
The responses are based on the limited information provided by the questioner and apply the laws and regulations at the time of posting. Other options could arise as rules and regulations may change over time, including but not limited to the passage of the Tax Cuts and Jobs Act of 2017. They are intended to provide general information, not specific accounting or tax advice; they are not intended or written to be used and cannot be used for the purpose of avoiding or evading taxes or penalties under the IRS code or regulations. Views expressed do not imply an opinion of the PICPA, its officers, directors, employees, or members.
Financial FAQs

Search the most frequently asked finance and accounting questions and read the responses from PICPA members. Always consult a CPA before taking action.