Okay, imagine this: You’re a real estate developer and you’ve found the perfect land for your real estate project. So you approach the owner of the land about selling and they ask you to bring an offer. How do you calculate land value? What is the land even worth to you? What if there are no comparable properties to use to accurately appraise the land? How can you justify the offer you’re about to give the seller?
In this article, we will learn about the ways to calculate land value- be it for selling or for taxes.
Valuation of land is much more than just calculating its value. Nowadays, it requires in-depth study and understanding of the subject matter with related acts, rules, and regulations.
How To Calculate Land Value?
A few important points are to be kept in mind to calculate land value. The price of the land and the price of the improvements, make up the purchase price, such as for a house. The sellers and agents usually only list the final closing price on any real estate contracts. So this might not be listed on the sales and purchase agreement. In terms of accounting, the land is not eligible for depreciation, but the property is.
After taking these two things into consideration, we can now calculate the current market value of land in one of three ways:
The sale is reported to the local assessor every time a piece of real estate is bought and sold. This is done to make them aware of the change of ownership and the price that was paid for the property.
The assessor can use this data, along with comparable property sales in the area to determine the most realistic value of the property.
An appraisal, performed by a professional appraiser, is an unbiased assessment of a property’s value. It is accompanied by supporting data to support the validity of the valuation. Appraisers will typically use the income approach, the sales comparison approach, and/or the cost approach to determine what the most realistic value of the property is.
It is performed when most properties are bought and sold.
Insurers are the best at financial planning. They are the ones who are legally required to pay for the replacement cost of a piece of property if the insurance contract is written as such.
All three of these land-valuation methods are justified in the eyes of the law. So, how can you know which method is right for you? This will depend on your circumstances or objectives.
If you would benefit by claiming as high a depreciation as possible, go with one that has the lowest land value, as a percentage of the overall property.
If you would benefit by claiming a lower depreciation, that is on the improvements such as a house or buildings, you would use the method that yields the highest land value as a percentage of the property overall.
When determining the land value for tax purposes, the best source of information is the government. Why so? Because it enforces the rules for all determinations as to land and property valuation for tax purposes.
How To Value A Piece Of Land?
You determine land value by calculating it as a percentage of the overall value of a piece of property, that is, land and improvements, such as houses or buildings. Now let us understand this with an example.
Mr. Sharma bought an office building for ₹100,000. The property tax statement shows:
Improvements= ₹60,000 (75 percent).
Land= ₹20,000 (25 percent).
Total Value= ₹80,000 (100 percent) .
Multiply the purchase price (₹100,000) by 25 percent to get a land value of ₹25,000. You can depreciate your ₹75,000 bases in the building.
How To Find The Land Value Of My Home?
Find the land value of the home as follows:
- Allocate 85% (₹136,000 / ₹160,000) of the purchase price to the house and 15 percent (₹24,000 / ₹160,000) of the purchase price to the land.
- Your basis in the house is ₹170,000 (85 percent of ₹200,000) and your basis, or value, of the land, is ₹30,000 (15 percent of ₹200,000).
- So, in this example, the value of the land is ₹30,000, or 15 percent of the value of the overall property, and the value of the house is ₹170,000, 85 percent of the total value of the property overall.
Steps To Calculate Land Value In India
1. Know the accurate details of the property
Know the accurate details of the property in a jurisdiction such as a district, taluka, division, or village and the type of property such as (land, residential, office, shop, and industrial unit).
2. Locate the property
Locate the division/ village with sub-zones and CS/CTS number of the property with the help of an accountant. You can find the rates of property such as land, residential, office, shop, and industrial units. Rates of the built-up area are per square meter hectare.
3. Decide the rates
Increase or decrease the rate according to various factors to get the true market value of the property. A guideline issued by the state government can help you decide the increase and decrease rate.
There are various variations while calculating the market value such as,
- Bungalow or flat under group housing project, row house, etc.
- Building without lift multi-story building with lift (floor wise)
- Completed age building
- Car parking (Open space Parking/ Closed Parking)
- Terrace, open land with ground floor, etc
4. Calculation on the basis of Built-up area
Area= 500 sq. feet carpet
- Convert sq. feet to built-up
500*1.2= 600 sq. feet built up
- Convert in sq. meter
600/10.72= 55.762 sq. meter built-up
- Rate*Area= Market Value
Thus, ₹88,200 * 55.762 = ₹ 4918208.40
- Rounded to ₹ 4918200
Calculate stamp duty
- Market value of property= ₹ 4918200 (M.V.)
- Agreement value of property= ₹ 5500000 (A.V.)
- Stamp duty is applicable on agreement value
- A.V. * 5% stamp duty rate= ₹ 275000 (S.D.)
- The registration fee is 1% on true market value or agreement value of the property, whichever is higher.
Calculating the land value for tax purposes may seem tricky, but it doesn’t have to be. A land value estimator or land value calculator can help you, but once you understand the different methods the government, as well as most appraisers, tax officials, and real estate professionals use to calculate the current market value of land, it’s not a difficult process to determine property valuation for tax purposes, or for other purposes as well.