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So we need to figure out exactly where we could build considering modern-era set-backs, as well as what could be done with the bare lot if nothing could be built.

I don't know that you need to figure out exactly where you could rebuild - just that you are able to rebuild on the property. If the property is rebuildable, then just using the current residential lot value would be the right thing to do. It's only if you can't rebuild that you would need to figure out what the residual value would be. And even then, because there is still a building on the property, I would say that using the current value of the land as a residential lot would still be appropriate, because that's what the lot was valued as when you put the property into service as a rental.

I guess what I'm saying is that I don't think that you really need to worry about what happens if the building burns down or gets condemned, unless that actually happens. For right now, the property, as-is, has land with a residential lot value, and a building value. The building value plus any improvements that you make would be what you could depreciate.

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