What Is Land Value and How Is It Used for Cost Segregation?
If you're a real estate investor exploring cost segregation, you've likely come across the term “land value.” It’s a critical—but often misunderstood—factor in calculating depreciation. Here's what you need to know to avoid costly mistakes and unlock maximum tax savings.
What Is Land Value in Real Estate and Why It Matters for Cost Segregation
Land value refers to the portion of a property's purchase price reasonably allocated to land, based on supportable market data such as assessor ratios, third-party appraisals, or comparable sales.
Per IRS rules, land is non-depreciable—only improvements like buildings, parking lots, and stormwater systems can be depreciated. That’s why allocating land value correctly is the first step in determining your depreciable basis.
When you buy real estate, your total purchase price includes:
- Land (non-depreciable)
- Improvements (depreciable): buildings, site work, landscaping, electrical systems, HVAC, and more
⚠️ Overlooking land value—or underestimating it—can lead to over-depreciation and increase your IRS audit risk.
How to Allocate Land Value for a Cost Segregation Study
Before you can start a cost segregation study, you must first subtract land value from your property’s total basis. Here’s how the process works:
- Determine your total purchase price (e.g., $2,000,000).
- Allocate a portion to land using property tax data, an appraisal, or reasonable market comps (e.g., 20% or $400,000).
- Subtract land value to calculate your depreciable basis (e.g., $1,600,000).
- Conduct a cost segregation study to reclassify the depreciable basis into 5, 7, 15, and 27.5-year asset classes.
Real Estate Depreciation Example:
You purchase a property for $2,000,000, and allocate $400,000 to land. Your depreciable basis is $1,600,000.
A cost segregation study may identify $600,000 in assets that qualify for accelerated depreciation over shorter recovery periods, allowing you to deduct more in year one.
IRS Rules on Land Value Allocation
The IRS requires a reasonable and supportable method for land value allocation. Common methods include:
- County assessor’s property record (often shows land vs. improvement ratio)
- Qualified appraisal reports
- Comparable property sales in the area
The goal is to avoid inflating depreciation by allocating too little to land—something the IRS could challenge in an audit.
Why Getting Land Allocation Right Is So Important
Land isn’t depreciable. That means every dollar mistakenly included in the depreciable basis is a red flag to the IRS. If discovered in an audit, it could trigger:
- Disallowed deductions
- Amended tax returns
- Penalties and interest
At RE Cost Seg, our studies are built to comply with the IRS Audit Technique Guide and ensure your land value is allocated using supportable documentation such as tax records, appraisals, or verified market data.
How RE Cost Seg Helps
We specialize in cost segregation studies that follow IRS-compliant methodologies, including the proper exclusion of land from depreciation. Here’s what you get with RE Cost Seg:
- Support from experienced engineers and tax professionals
- Over 6,000 studies completed and $600+ million in tax savings delivered
- IRS Audit Protection Assistance included with every study
Want to estimate your investment property's depreciation benefit?
👉 Try our Real Estate Depreciation Calculator
FAQs About Land Value and Cost Segregation
Q: Is land included in depreciation calculations?
A: No. Land is not depreciable under IRS rules. It must be excluded from your property’s depreciable basis.
Q: How do I determine land value for depreciation?
A: Use property tax assessments, appraisal reports, or comparable sales to reasonably allocate a portion of the purchase price to land.
Q: What happens if I allocate too little to land?
A: It may result in over-depreciation and could lead to IRS penalties or required corrections through Form 3115.
Q: Why does land value matter in a cost segregation study?
A: Because only the value of depreciable improvements can be accelerated—land must be excluded first to determine how much is eligible for faster depreciation.
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