Can You Depreciate Farm Land and Other Farm Assets?

Correctly categorizing farm assets is an important part of managing agricultural operations and their tax obligations. The way an asset is classified determines its treatment for tax purposes, directly influencing taxable income and financial planning.

The Nondepreciable Nature of Farmland

The question of whether farmland itself can be depreciated is a common one, and the answer is no. Tax regulations do not permit the depreciation of land. The reason for this rule is that depreciation is an allowance for property that suffers from exhaustion or wear and tear. Since land is considered to have an unlimited useful life and does not get “used up,” it fails to meet the criteria for depreciation.

Instead of being depreciated, the cost of acquiring land establishes its “basis.” This basis is the value from which any gain or loss is calculated when the property is sold. For example, if a farmer purchases a tract of land for $500,000, that amount becomes the initial basis and is subtracted from the sales price in the future to determine the taxable gain.

Depreciable Land Improvements

While the land itself is not depreciable, many costs incurred to prepare and improve it for farming are treated differently. Improvements that are not an integral part of the land and have a determinable useful life can be depreciated.

Expenses for general land preparation, such as clearing, grading, and leveling, are added to the land’s basis and are not depreciable. However, an exception exists for costs related to soil and water conservation. Farmers may deduct expenses for activities like leveling and terracing if they are consistent with a conservation plan.

Other improvements that can be depreciated include assets that wear out over time. Examples include water wells, drainage systems, irrigation systems, fences, and paved roads. The costs for these assets are recovered through depreciation. Under the Modified Accelerated Cost Recovery System (MACRS), fences and grain bins are classified as 7-year property.

Other Depreciable Farm Assets

Beyond land and its direct improvements, a farm has numerous other assets that are depreciable. The IRS provides specific guidance on the classification and recovery periods for these types of property in publications like the Farmer’s Tax Guide (Publication 225).

Farm buildings represent a significant category of depreciable assets, including structures such as barns, sheds, silos, and specialized single-purpose agricultural structures. General-purpose farm buildings like barns and sheds are depreciated over a 20-year recovery period under GDS. Single-purpose structures, such as those for housing livestock, may have a shorter 10-year recovery period.

Machinery, equipment, and vehicles are also depreciable. New farm machinery is classified as 5-year property, while used farm machinery is classified as 7-year property. Livestock purchased for draft, breeding, or dairy purposes can also be depreciated, with breeding cattle classified as 5-year property and breeding hogs as 3-year property.