Every cost segregation study starts by subtracting one number: land value.

Land cannot be depreciated. The IRS requires you to separate the value of your land from the value of your building and its improvements before calculating any depreciation deductions (IRS Publication 946). That separation, called your land allocation, directly determines your depreciable basis.

You may have heard a figure like 18% described as the "standard" land allocation. It is a rough ballpark that some people use as a starting point. It is not an IRS rule, and it is not always accurate. Depending on your location and property type, your defensible number could be well under 10% or above 40%.

This article explains where a figure like 18% comes from, how allocations vary by region and property type, and how to support your number if the IRS asks.

Key Takeaways

• Land is not depreciable. Your land allocation directly reduces your depreciable basis.
• A figure like 18% is an unofficial ballpark, not a rule. Your actual allocation should reflect your property's location and type.
• Regional differences are large. Dense coastal markets can run far higher than rural areas.
• Property type matters. Industrial assets typically carry the lowest allocations, and urban office and retail tend to run highest.
• Support your number with an assessor ratio, an appraisal, or comparable sales, and keep the documentation.
• First-year savings from reclassified assets depend on bonus depreciation, which is 100% for qualified property acquired after January 19, 2025 under current law.

What Land Allocation Is and Why It Matters

When you buy real estate, your purchase price covers more than one asset. It covers the land, the building and its components, and site improvements such as paving, fencing, and certain landscaping. Land can never be depreciated, though the building and qualifying land improvements can (IRS). Landscaping generally qualifies as a 15-year land improvement only when it is so closely associated with the building that it would be destroyed if the building were replaced; general clearing, grading, and fill are part of the land and are not depreciable. The IRS requires you to assign a share of the purchase price to land value and remove it before you calculate deductions.

This is not a minor detail. It sets the ceiling on your entire depreciation schedule.

Example: the $100,000 difference (residential rental)

Say you buy a residential rental property for $1,000,000.

• At 15% land allocation: depreciable basis = $850,000
• At 25% land allocation: depreciable basis = $750,000
• Difference in depreciable basis: $100,000

Residential rental property is depreciated over 27.5 years using the straight-line method (IRS). Spread over that period, a $100,000 difference in basis is about $3,636 per year ($100,000 ÷ 27.5). Commercial property uses a 39-year period, so the same difference there is about $2,564 per year ($100,000 ÷ 39).

A cost segregation study widens the gap. Suppose 30% of your depreciable basis reclassifies into shorter-life assets, a reasonable benchmark for many residential properties. At a 15% land allocation, that moves $255,000 into faster categories. At 25%, it moves $225,000. The difference is $30,000.

How much of that lands in year one depends on bonus depreciation. Under the One Big Beautiful Bill Act, 100% bonus depreciation is restored for qualified property acquired after January 19, 2025, and made permanent (IRS). With 100% bonus depreciation, the full $30,000 difference is deductible in year one. That is worth $11,100 at a 37% marginal rate. Without bonus depreciation, the amount spreads across each asset's recovery period, so the first-year figure is much smaller. Remember that accelerated deductions are a timing benefit, and they can increase depreciation recapture when you sell.

Who determines the land allocation, me or the IRS?

You propose the allocation, and the IRS can challenge it. Your job is to use a defensible method and document your rationale. The three most common approaches are county assessor ratios, independent appraisals, and comparable land sales.

Where a Figure Like 18% Comes From

There is no official land allocation percentage. Neither the IRS nor any practitioner group has established required standards or percentages for cost segregation studies (IRS Cost Segregation Audit Techniques Guide). A number like 18% is simply a rough average that some preparers cite from experience. That same IRS guide tells examiners to treat "rule of thumb" percentages with caution, because they lack supporting documentation.

County assessor records are the most commonly used starting point. Most counties publish separate assessed values for land and improvements, and the ratio between them gives you a defensible starting figure. For example, if a county assesses a property at $200,000 total with $36,000 allocated to land, the assessor ratio is 18% ($36,000 ÷ $200,000). Apply that ratio to your actual purchase price and you have a starting allocation.

Assessor ratios have limits. Assessed values do not always track the market, some counties reassess infrequently, and local formulas can lag recent improvements or market shifts. Use the assessor ratio as a starting point, then verify it.

How Location Changes Your Land Allocation

Location is often the single biggest driver of land allocation. The ranges below are illustrative. They reflect observed patterns, not an official schedule, so treat them as context rather than a substitute for your own data.

High-cost markets tend to push land allocations well above a mid-teens figure:

• Dense urban cores such as Manhattan: land can represent roughly half or more of total value
• Supply-constrained coastal metros such as San Francisco and Honolulu: often 30% to 50% or higher

Lower-cost markets tend to pull allocations down:

• Rural Midwest and South: frequently single digits to the mid-teens
• Smaller metro areas: often the low teens, depending on property type

Example: same price, different allocation

Two investors each buy an $800,000 rental property.

• Investor A, coastal California, 35% land: depreciable basis = $520,000
• Investor B, rural Texas, 10% land: depreciable basis = $720,000

Investor B has $200,000 more in depreciable basis. Applying a generic mid-teens figure without checking your market can either cost you deductions or invite an IRS challenge.

Can I use a different land value than my county assessor's statement?

Yes. The assessor ratio is one method, not the only one. If you believe the assessed ratio does not reflect market conditions, you can commission an independent appraisal or use comparable land sales data. Whichever method you choose, keep the supporting evidence in your files.

Land Allocation by Property Type

Land allocation also varies by property type. Asset classes differ in how much of the total investment goes into the building and site versus the land. The ranges below are illustrative starting points, not IRS benchmarks:

• Single-family residential: roughly 15% to 25%
• Apartment buildings: roughly 10% to 20%
• Commercial real estate (office and retail): roughly 15% to 30%
• Industrial properties (warehouse and manufacturing): roughly 8% to 15%
• Hotels: roughly 10% to 20%
• Self-storage: roughly 10% to 18%

Industrial and warehouse properties tend to sit at the low end, because the building and site improvements make up most of the investment. Urban retail and office often run higher, because prime locations carry premium land prices. If your allocation falls well outside the typical range for your property type and market, expect closer scrutiny.

How to Support Your Land Allocation

The IRS does not prescribe a single method for valuing land, but it does require that your allocation be reasonable and supportable. Four common methods:

1. County assessor ratio: apply the assessed land-to-total ratio to your purchase price. Simple, widely used, and easy to document.
2. Independent appraisal: hire a licensed appraiser to value the land separately. This is the most defensible option for high-value or unusual properties. An appraisal does not automatically produce a lower land ratio, but it does provide a more reliable, defensible methodology.
3. Comparable land sales: research recent sales of similar vacant parcels nearby. Useful when assessor data is outdated or unavailable.
4. Purchase agreement allocation: negotiate the land-and-building split with the seller and include it in the purchase agreement. When buyer and seller have adverse tax interests and negotiate the allocation at arm's length, it can provide strong support and may bind both sides. Negotiate it before closing; an unfavorable allocation can be difficult to change later.

An appraisal is worth considering when:

• Your property is high-value, roughly $2 million or more
• You believe the assessor ratio overstates land value
• Your market is changing quickly
• Your allocation falls well outside the typical range for your property type and market

A standalone land appraisal typically costs several hundred to a few thousand dollars. In the right situation, it can preserve depreciable basis worth far more in deductions. You can model the impact yourself with our depreciation calculator.

The right land allocation protects your deductions. A higher land allocation does not make basis disappear; it preserves more basis in the land, which can reduce capital gain when you sell. The cost is timing and tax character: less basis is depreciated during ownership, while depreciation recovered at sale may be taxed as recapture at up to 25% and land appreciation is generally capital gain. An aggressive low allocation is not free money, either. If the evidence does not support it, you invite IRS attention. Use a defensible method and keep your documentation.

Ready to see how land allocation affects your property's depreciation? Get a free proposal from R.E. Cost Seg and we will run the numbers.

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