Can I Depreciate Land? Why Not and What You Can Instead

Depreciation in accounting allows businesses to recover the cost of certain assets over their useful life, reflecting how assets wear out or become obsolete. Land itself is generally not depreciable for tax purposes. This article explains why land cannot be depreciated and outlines what parts of a property can be.

Why Land Is Not Depreciable

Depreciation is fundamentally tied to an asset’s “useful life,” which is the estimated period an asset is expected to remain in service and generate revenue. Assets like buildings, machinery, or vehicles have a finite useful life because they experience wear and tear, obsolescence, or consumption over time. The cost of such assets is systematically expensed over this estimated period.

Land, by contrast, is considered to have an indefinite useful life. It does not wear out, get consumed, or become obsolete in the same manner as other physical assets. Land often appreciates in value over time due to various factors like development or market demand, which further distinguishes it from assets that lose value.

Depreciable Assets on Land

While the land itself is not depreciable, improvements made to the land and structures built on it are. These assets have a finite useful life and are subject to wear, tear, or obsolescence, making them eligible for depreciation.

Buildings and other structures, such as commercial buildings, residential homes, garages, and sheds, are primary examples of depreciable assets. Land improvements also qualify for depreciation. These include items like fences, driveways, parking lots, sidewalks, retaining walls, and drainage systems. Additionally, utility connections like sewer and water lines are considered depreciable land improvements.

Even landscaping, if it is not natural growth and is part of a business asset, can be depreciated. For instance, planted trees or shrubbery that are part of a commercial property’s design and would be replaced if the building were replaced are depreciable. Equipment not permanently affixed to the structure but used in a business conducted on the land also falls into this category.

Allocating Property Costs

When a property consisting of both land and buildings or improvements is purchased for a single price, the total cost must be allocated between the non-depreciable land and the depreciable assets. This allocation is necessary to determine the proper cost basis for calculating depreciation deductions on the eligible assets.

One common method for allocation involves using the local property tax assessor’s valuation. Property tax statements often provide separate assessed values for land and improvements. The proportionate ratio of these assessed values can then be applied to the total purchase price to determine the cost allocated to each component. For example, if the tax assessor values land at 20% and improvements at 80% of the total assessed value, then 20% of the purchase price would be allocated to land and 80% to the depreciable assets.

Another approach is to obtain an independent appraisal. A professional appraiser can provide a fair market value for both the land and the improvements, offering a robust basis for allocation, especially for complex properties or if the tax assessment seems inaccurate. While this method can be more costly and time-consuming, it provides a detailed and defensible breakdown. Once the allocation is established, the cost allocated to depreciable assets becomes their basis for calculating depreciation. Different types of depreciable real property have varying recovery periods, such as 27.5 years for residential rental property and 39 years for non-residential real property, while land improvements generally have a 15-year recovery period.