Separating Improvements from Land

Not all of the cost of acquiring real estate is depreciable. Specifically, the cost of the land is not depreciable and must be separated from the improvements. Thus, you should identify and document at the time that you acquire real estate, the part of your overall acquisition cost allocable to improvements. One way to accomplish this is to retain a qualified real estate appraiser to make an allocation between land and improvements, or if the real property tax bill for the property includes an allocation, and most do, use that allocation. When using the property tax, the total of the allocation between the land and improvements probably will not equal the actual purchase price. In that case, simply allocate the land and improvements in the same proportion as the property tax bill. Any improvements made after the original purchase should be accounted for and depreciated separately, since there is no land allocation associated with the improvement.

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