How to Determine Depreciation of Land Vs. House

Real estate depreciation is a significant tax benefit for investors. It is critical to appropriately determine the portion of the property's cost that is allowable for depreciation. Houses are depreciable, but land is not since land is considered to be permanent with an unlimited useful life. A house is typically purchased with land for a price that includes both the house and the land together. For depreciation purposes, it is up to the buyer to determine the cost attributed to the house versus the cost attributed to the land.

Things You'll Need

• Purchase contract
• Settlement statement
• Tax appraisal record

Instructions

1. Review the property purchase contract. Determine whether the buyer and seller documented the purchase price split between the house and the land. If they did, use the house price as the depreciation basis.

2. Review the real estate settlement statement if the purchase contract did not split the purchase price between the house and the land. Determine whether the buyer and seller documented the purchase price split between the house and the land. If they did, use the house price as the depreciation basis.

3. review the most current tax appraisal record if the settlement statement did not split the purchase price between the house and the land. Determine the tax value allocation percentage between the land and the house. Use this allocation percentage to calculate a split of the purchase price between the house and the land. Use the calculated house price as the depreciation basis.

Tips & Warnings

• Add other allowable purchase costs to the house price to determine the depreciable basis, such as legal and recording fees.

• For audit purposes, clearly document and retain the house and land allocation calculation along with all supporting records.

References

• IRS: How to Depreciate Property
• Real Estate Owner: Depreciation