Can You Depreciate Land?

No. You cannot depreciate the cost of land, because land does not wear out, become obsolete, or get used up (IRS Publication 946). That one sentence carries the whole rule. What sits on the parcel may still be depreciable, and the test that excludes land is the same test that decides which of those costs qualify.

The rule is worth understanding rather than memorizing, because the money is in the carve-outs. A land purchase almost never buys land alone, and the parts of the transaction that do have a determinable life are deductible over that life.

The Rule, and Where It Is Written

The tax regulation states the boundary rather than the conclusion. In the case of tangible property, the depreciation allowance applies only to that part of the property subject to wear and tear, to decay or decline from natural causes, to exhaustion and to obsolescence, and it does not apply to land apart from the improvements or physical development added to it (26 CFR 1.167(a)-2-2)). Read the last clause carefully. It is not a blanket exclusion of everything on the parcel. It excludes land itself, and it deliberately leaves in the improvements and physical development added to it.

US accounting standards get to the same place from the definition of the technique. Depreciation accounting is a system that distributes the cost or other basic value of tangible capital assets, less salvage if any, over the estimated useful life of the unit in a systematic and rational manner (AICPA, Accounting Research Bulletin No. 43, Chapter 9, Section C, paragraph 5). An estimated useful life is the input the method needs, and land does not supply one, so there is nothing to distribute. The general mechanics of the allocation are set out in depreciated, and the tax recovery system that runs on top of them in MACRS.

The Land Preparation Carve-Out

This is the part of the rule worth real money. The cost of land generally includes the cost of clearing, grading, planting and landscaping. Even so, certain land preparation costs incurred in preparing land for business use can be depreciated, and the test is association: those costs must be so closely associated with other depreciable property that a life can be determined for them along with the life of the associated property (IRS Publication 946).

The IRS example is the cleanest way to see it. A business constructs a new building and pays for grading, clearing, seeding and planting bushes and trees. Some are planted right next to the building, others around the outer border of the lot. Replacing the building would destroy the ones next to it, so those are closely associated with the building, have a determinable useful life, and are depreciable. The rest have no determinable life, so their cost is added to the basis of the land (IRS Publication 946).

Two things follow for a preparer. What decides the answer is not the invoice but the physical relationship. And the analysis has to be documented at the time the work is done, because reconstructing which trees stood next to a building four years later is not a task anyone enjoys.

Splitting a Lump-Sum Purchase Between Land and Building

Most commercial purchases arrive as one number for the whole property, and depreciation cannot start until that number is split.

Where buildings and the land they stand on are bought for a lump sum, the basis is allocated among the land and the buildings so the depreciation allowable on the buildings can be figured. The basis of each asset is the lump sum multiplied by a fraction whose numerator is the fair market value of that asset and whose denominator is the fair market value of the whole property at the time of purchase. Where the fair market values are not certain, the basis can be allocated on the assessed values used for real estate tax purposes (IRS Publication 551).

Lump-sum purchase price                            900,000

FMV of building at purchase                        800,000
FMV of land at purchase                            200,000
FMV of whole property                            1,000,000

Basis of building  900,000 x (800,000/1,000,000)   720,000   depreciable
Basis of land      900,000 x (200,000/1,000,000)   180,000   not depreciable

The price paid came in below the appraised total, and the fraction spreads that difference across both assets in proportion. That is why a preparer cannot book the land at its appraisal and plug the building with the remainder.

The assessed-value fallback is the practical one, because a county assessment already separates land from improvements and it is contemporaneous evidence rather than a number produced to support a deduction.

Demolition is the trap on the other side of the same rule. Demolition costs and other losses incurred for the demolition of any building are added to the basis of the land on which the demolished building stood (IRS Publication 551). Money spent tearing a building down never becomes a deduction. It becomes non-depreciable land basis.

Natural Resources Are Depleted, Not Depreciated

Where the value of a parcel sits in what can be taken out of it, a different allowance applies. The same regulation draws the line itself. The depreciation allowance does not apply to natural resources which are subject to the allowance for depletion provided in section 611 (26 CFR 1.167(a)-2-2)). For mines, oil and gas wells, other natural deposits and timber, a reasonable allowance for depletion is deducted in computing taxable income instead, and standing timber is computed solely on the adjusted basis of the property (26 CFR 1.611-1).

Depletion is not a way to depreciate land. It recovers the basis of the deposit as the deposit is extracted, which is the exhaustion the depreciation rule already contemplated and land itself does not undergo. The two methods that reach every other deposit, and the oil and gas carve-out on top of them, are in depletion.

Where Firms Get This Wrong

Three errors account for most of the damage, and none of them is technical.

A single fixed asset record called “building” that includes the land overstates depreciation every year until someone reconciles the schedule to the closing statement. Site work capitalized wholesale to land is the mirror error, and it buries real deductions. Demolition costs expensed as repairs is the third, and the publication is explicit that they are added to the basis of the land instead (IRS Publication 551).

None of them are caught by a review of the depreciation schedule alone. They are caught by reading the closing statement and the contractor invoices against the schedule, which is a documentation task rather than a judgment call.

Common Questions

Can Land Ever Be Written Down?

Yes, but not through depreciation, and this is the book answer rather than the tax one. Land is a long-lived asset, so the impairment rules reach it: an event-driven write-down when the carrying amount stops being recoverable, not a periodic allocation. The two-step recoverability test is in impairment losses.

Are Land Improvements Depreciable?

Improvements with a determinable useful life are, and the regulation says so directly by excluding only land apart from the improvements or physical development added to it (26 CFR 1.167(a)-2-2)). Fences, paving, drainage and site lighting are the usual candidates. What decides each one is whether a life can be determined for it, which for landscaping means whether it is tied to a depreciable structure closely enough that replacing the structure would destroy it.

Accountably places trained offshore accountants and tax preparers inside US CPA and EA firms, and a firm can grade that fixed asset work on its own files through a trial task before a client engagement depends on it.