Land vs Building: Allocating Purchase Price for Depreciation

By Tom, CPA · Updated October 27, 2026

Part of: Rental Property Taxes

TL;DR: Only the building is depreciable, so you must split your purchase price between land and building. Common methods are the property tax assessor ratio, an appraisal, or a cost-based approach. Pick a reasonable method, document it, and apply the same percentages to your closing costs.

Educational only, not tax, legal, or investment advice. Examples are illustrations, not predictions. Rules and limits change; verify current figures and talk to a qualified professional about your situation.

Your tenant pays the mortgage; the IRS pays for the roof over 27.5 years. It does not pay for the dirt under the roof, ever. Land is not depreciable because, in the IRS's view, it does not wear out, get used up or become obsolete (Pub. 946).

So every rental purchase starts with an allocation question: how much of the price was the building and how much was the land? Pub. 527 says that if you buy buildings and the land they sit on for a lump sum, you allocate the cost between land and buildings based on their fair market values at the time of purchase. It also offers a practical shortcut: you can use the assessed values for real estate tax purposes. This guide walks through the main methods, how closing costs get split, and how to make the allocation hold up if anyone asks.

CPA Warning Label: A 90% building allocation on a lot in an expensive neighborhood is the depreciation version of claiming your cat as a dependent. It looks fine until someone actually checks.

Why land never depreciates

Depreciation recovers the cost of property that wears out. Land, according to Pub. 946, cannot be depreciated because it does not wear out. Neither can the costs of clearing, grading, planting and landscaping that are part of the cost of the land itself. Improvements to land that do wear out, such as driveways, fences, sidewalks and some landscaping close to the building, are generally depreciable as 15-year land improvements (see land improvements).

The land share matters every year: each $10,000 shifted from land to building adds about $364 a year of depreciation (10,000 / 27.5). Over 27.5 years that is the full $10,000 of deductions, recovered later as recapture if you sell.

Illustration: Two landlords each buy a $500,000 rental.

The difference is about $873 a year in this example. Worth getting right, not worth fabricating. Over a 10-year hold, that is roughly $8,700 of tax deferred, not eliminated.

Assessor ratio method

Pub. 527 explicitly allows using the assessed values for real estate tax purposes to allocate. Most property tax bills or county assessor websites show separate land and improvement values, even if the total assessed value is well below the purchase price.

The method uses the ratio, not the dollar amounts:

1. Find assessed land value and assessed improvement value for the year of purchase.
2. Compute building % = improvement value / total assessed value.
3. Apply that % to your purchase price plus allocable closing costs.

Illustration: The assessor shows land $90,000 and improvements $210,000 (total $300,000). Building ratio = 70%. Purchase price is $450,000. Building basis = $315,000; land = $135,000. Annual depreciation = $315,000 / 27.5 = $11,455.

Weaknesses: some assessors rarely update land values, some states assess at a fraction of market value with odd land-building splits, and in hot markets land often appreciates faster than improvements. If the assessor's split looks clearly wrong for your neighborhood, a different method may be more reasonable.

Appraisal and cost-approach methods

Appraisal. A lender's appraisal often includes a site value under the cost approach section. A separate appraisal ordered specifically to allocate land and building is the most defensible method, especially for expensive properties or where assessor values are stale. Appraisers use comparable land sales to value the site.

Cost approach. Estimate the replacement cost of the building (using construction cost data, less depreciation for age and condition) and treat the remainder of the price as land. This can work for newer properties.

Insurance replacement value. Some landlords look at insured replacement cost of the dwelling as a sanity check. Replacement cost is not fair market value and can overstate the building, so it is better as a check than as the method.

Cost segregation study. An engineering-based study allocates price among land, land improvements, building and personal property components; the IRS Cost Segregation Audit Techniques Guide describes what examiners expect from quality studies. See is cost segregation worth it.

Contract allocation. If the purchase contract between unrelated parties allocates price among land, building and personal property, that allocation can be persuasive, but only if it reflects real values rather than a number the buyer typed in.

Closing costs that get added to basis

Pub. 551 and Pub. 527 list settlement fees and closing costs that are added to the basis of the property, including abstract fees, charges for installing utility services, legal fees for title search and preparing the sales contract and deed, recording fees, surveys, transfer taxes, owner's title insurance, and amounts the seller owes that you agree to pay (such as back taxes). Those costs are split between land and building using the same ratio as the purchase price.

Loan costs (points, origination fees, lender-required appraisal) are not added to basis; they are amortized over the loan. Details are in which closing costs get added to rental basis.

Illustration, continuing the 70% example: $6,000 of basis-adding closing costs. Building gets $4,200; land gets $1,800. Total building basis: $315,000 + $4,200 = $319,200.

Furnished properties and package deals

Many purchases include more than land and a building. A furnished short-term rental may come with $30,000 of furniture; a small apartment building may come with laundry machines and a parking lot. Each piece has a different tax life:

Illustration: A furnished condo sells for $400,000. A furniture inventory valued at fair market value supports $20,000 for furnishings. The assessor ratio of 75% building is then applied to the remaining $380,000: building $285,000, land $95,000. The $20,000 of furniture is 5-year property and, if acquired after January 19, 2025, may qualify for 100% bonus depreciation as of Oct 2026.

When several properties are bought in one deal for one price, allocate the total among properties first (by relative fair market value), then split each property between land and building. Shortcuts like "same percentage for all of them" only work if the properties really are similar.

Audit-proofing the allocation

• Save the evidence for the year of purchase: assessor page screenshot or tax bill, appraisal, contract.
• Write a one-paragraph memo stating the method, the inputs and the resulting percentages. File it with the closing statement.
• Be consistent: apply one method to price and closing costs.
• Sanity-check against the neighborhood. Urban lots and beach lots can be 40% to 70% of value; rural lots can be much less.
• Don't cherry-pick: running three methods and keeping the one with the most building is the kind of thing that looks bad in writing.
• Personal property included in the price (appliances, furniture) can be separately valued and depreciated faster.

If an examiner challenges the split, the question is whether your allocation reflects fair market value at the purchase date. Contemporaneous, independent evidence wins. A spreadsheet made the night before the audit does not.

Converted homes and inherited property

Converting a home to a rental. Basis for depreciation is the lesser of fair market value or adjusted basis on the conversion date (Pub. 527), and you still need to split that between land and building. Use the assessor ratio or an appraisal from the conversion date, not the purchase date.

Inherited property. Basis is generally fair market value at death. The estate's appraisal often values land separately; use it.

Condos. You own an interest in the land through the association. An allocation is still required, though the land share is often smaller.