Calculating the Land and Building Value of Your Rental Property

Calculating land basis is an important step for rental property owners because a real estate purchase usually includes both the building and the land beneath it.

For tax purposes, you need to separate the purchase price between land and building. The land portion is your land basis, or “basis for land only.” The building portion is generally the amount used to calculate depreciation.

If you allocate 100% of the purchase price to the building, you may overstate depreciation because land cannot be depreciated. The goal is to use a reasonable method to determine how much of your total cost belongs to land and how much belongs to the building.

IRS guidance states that if a property purchase includes both land and buildings, the cost must be divided between the land and buildings to figure the basis for depreciation of the building. If the fair market values are uncertain, assessed values for real estate tax purposes can be used. (IRS)

Allocating the Purchase Price Between Land and Building

The easiest method to allocate the purchase price between the land and the building is to find the property tax card. You can do this by visiting the local property assessor’s website or office.

The tax card will give you a value for the land and a value for the building. You will take those percentages and apply them to your purchase price.

Formula

Example

For example, you purchase a property for $100,000. You pull the property tax card and see that the county values the land at $5,000 and the building at $45,000. You would, therefore, apply a 10% ratio to the land and a 90% ratio to the building, or $10,000 to land and $90,000 to the building based on your purchase price.

In this example, the value of land included in the total cost is $10,000, and the building basis is $90,000.

This method, while often easiest, does not always produce the best or most accurate result. In places like San Francisco or Washington, D.C., the land value per the property tax card can often exceed 50%!

What Is Basis for Land Only?

Basis for land only is the portion of your property’s total cost that is allocated to land. This amount is not depreciated. Instead, it remains part of your basis in the property and may matter when you later sell or otherwise dispose of the property.

For example, if you buy a rental property for $300,000 and allocate 20% to land, your basis for land only is $60,000.

Where Can You Find the Land Value of a Property?

The easiest place to start is usually the county property tax card or local assessor’s website. These records often show separate assessed values for land and improvements.

Other methods to explore are looking at the appraised value from the qualified appraisal you may have received. Sometimes the appraiser will break out the land value. You may also look at the replacement value on your insurance quote or have a real estate broker run a CMA (competitive market analysis) showing the value of vacant lots of similar size and location to your property.

Do not use an unsupported guess. The method should be reasonable, documented, and consistent with the facts of the property.

Can Land Be Depreciated?

IRS Publication 527 states that certain property cannot be depreciated, including land, and explains that the cost of land generally cannot be depreciated because land does not wear out, become obsolete, or get used up. (IRS)

FAQs About Land Basis and Building Value

What should I enter for the value of land included in the total cost?
Enter the portion of your purchase price allocated to land. A common method is to use the land percentage from the property tax card and apply that percentage to your actual purchase price.

What does basis for land only mean?
Basis for land only means the portion of your property’s total cost assigned to land instead of the building. This portion is generally not depreciated.

How do I calculate land basis?
Divide the assessed land value by the total assessed property value to get the land percentage. Then multiply your purchase price by that percentage.

Can I use the county property tax card?
Yes. The property tax card is often a practical starting point, especially if you do not have a better valuation source. If the values appear unreasonable, consider an appraisal, insurance replacement value, broker analysis, or CPA-supported method.

Can land be depreciated?
Generally, no. Land itself is not depreciated, which is why land and building value must be separated.

Need help calculating land basis or depreciation for a rental property? Hall CPA works with real estate investors to properly allocate basis, evaluate depreciation, and identify tax planning opportunities. Request a discovery meeting today.