Land Allocation — Glossary — IRS Depreciation Rules

Land Allocation

The partitioning of a real property's total basis between non-depreciable land and depreciable improvements. Land allocation is a prerequisite to every depreciation calculation because land is not depreciable under IRC §167. Common methods include the tax-assessor ratio, an independent appraisal, and a residual method.

STATUTE BASIS · IRC §167 · Treas. Reg. §1.167(a)-2

In context

Treas. Reg. §1.167(a)-2 establishes that no depreciation is allowable on land. Every basis calculation must therefore separate land from improvements before any MACRS schedule begins.

Three methods are commonly used:

Tax assessor ratio — apply the land-to-total assessed-value ratio from the county assessor record to the actual purchase price. Acceptable when assessor data is current and the ratio is plausible for the location.
Independent appraisal — a contemporaneous appraisal allocating value between land and improvements. The strongest evidence; commonly part of acquisition due diligence.
Residual method — value the improvements directly (replacement cost less depreciation) and treat the remainder of purchase price as land. Used when assessor data is stale or land is the disproportionate value driver.

Aggressive land understatement is a recurring IRS audit issue. A defensible land allocation is the first line item every cost segregation study verifies.

See basis for the broader framework.