Land vs Building Value Split for Depreciation
No credit card required
Land is not depreciable under IRC §167 and Reg. §1.167(a)-1—only the building and its structural components can be written off over time. This means your depreciable basis is always less than your total purchase price, and how you determine the land-to-building split directly affects how much depreciation you can claim each year.
Why the Land Split Matters So Much
On a $500,000 STR purchase, the difference between allocating 15% to land versus 30% to land is $75,000 of depreciable basis. Over a 27.5-year schedule, that's a difference of roughly $2,727 per year in depreciation deductions—or approximately $27,270 over a ten-year hold period. At a 30% marginal rate, that's over $8,000 in additional tax you pay because of an overly conservative land allocation.
Getting this split right from day one—using supportable, documented methodology—is one of the highest-leverage actions an STR owner can take when setting up their tax records.
The IRS can and does challenge land-to-building allocations that appear to minimize the land value without supporting documentation. Using a 5% land allocation in a coastal market where comparable properties show 35%+ land ratios is a red flag. Document your methodology and keep supporting records indefinitely.
Three Accepted Methods to Determine the Split
Method 1: County Tax Assessment Ratio
The most commonly used method. Your county assessor's records show separate assessed values for land and improvements. Take the land value divided by the total assessed value to get a percentage, then apply that percentage to your actual purchase price.
County Assessment Example
Most Common MethodProperty purchased for $480,000. County assessment: land $72,000, improvements $228,000 (total assessed $300,000).
Land allocation: $480,000 × 24% = $115,200
Depreciable building basis: $480,000 − $115,200 = $364,800
Annual depreciation (27.5 yr): $364,800 ÷ 27.5 = $13,265/year
Note: County assessments are made for property tax purposes and may not perfectly reflect market values. In rapidly appreciating markets, assessments often lag behind sale prices. The ratio, however, tends to be more stable than absolute values and is generally accepted by the IRS as a reasonable allocation method.
Method 2: Qualified Appraisal
A licensed appraiser can provide a formal land-vs.-improvements allocation as part of a standard property appraisal or as a standalone land-value opinion. This is the most defensible method under IRS scrutiny because it relies on the professional judgment of a state-licensed expert. If you are purchasing a property in a market where land values are unusually high or low relative to county assessments, a formal appraisal is worth the cost ($400–$800 for a standard residential appraisal).
Method 3: Cost Segregation Study
A cost segregation study goes further than just separating land from building—it reclassifies building components into shorter MACRS lives. The study necessarily establishes a land value as part of the analysis. For properties where significant reclassification opportunities exist, the cost segregation study pays for itself many times over and produces court-defensible documentation. See our guide to cost segregation for short-term rentals for full details.
Typical Land-to-Building Ratios by Market Type
| Market Type | Typical Land % | Building % | Notes |
|---|---|---|---|
| Urban coastal (NYC, SF, Miami Beach) | 35–55% | 45–65% | Land commands premium |
| Suburban resort areas | 20–35% | 65–80% | Varies by proximity to water/ski |
| Mountain/rural STR markets | 10–25% | 75–90% | Building dominates value |
| Midwest & secondary cities | 15–25% | 75–85% | More stable ratios |
| Desert/Southwest STR markets | 20–30% | 70–80% | Depends on lot size |
These ranges are generalizations. Always obtain property-specific data from county records or an appraiser rather than relying on averages.
Impact on Total Depreciation Available: Real Numbers
A $600,000 STR purchase in a mountain market. Three different land allocations and their effect on annual depreciation:
| Land Allocation | Land Basis | Building Basis | Annual Depreciation |
|---|---|---|---|
| 10% (aggressive) | $60,000 | $540,000 | $19,636/yr |
| 20% (typical) | $120,000 | $480,000 | $17,455/yr |
| 30% (conservative) | $180,000 | $420,000 | $15,273/yr |
The difference between the aggressive and conservative allocation is $4,363 per year. Over ten years at a 30% tax rate, that's a $13,089 difference in taxes. Use the allocation your data supports—not the most aggressive number you think you can defend.
What Happens If You Get the Split Wrong
If the IRS audits your depreciation and determines you allocated too little to land, they will adjust your depreciable basis downward and disallow excess depreciation claimed in prior years. This creates additional taxes owed plus interest and potentially penalties. The IRS has the authority to recharacterize the split based on facts and circumstances under Reg. §1.167(a)-1(c), which states that the value of land must be determined at the time of acquisition.
Pull your county assessor records at the time of purchase and save a screenshot or PDF with the date. This creates a contemporaneous record of the assessed land ratio. If the county later reassesses the property, your original documentation remains intact.
How Cost Segregation Changes the Equation
A cost segregation study doesn't change the land allocation—land is still non-depreciable regardless. What it does is reclassify portions of the building basis from 27.5-year or 39-year property into 5-year, 7-year, or 15-year property. This accelerates the depreciation on the building basis you do have. For a $480,000 building basis, a cost segregation study might reclassify $80,000–$120,000 into shorter-lived assets, generating significantly larger deductions in early years. See the full analysis in our STR depreciation guide.
Know Your Exact Depreciable Basis
DeductFlow tracks your cost basis, land allocation, and depreciation schedule from day one—so you always know exactly how much you can deduct each year.
Start Tracking Free →Pro from $19/month or $149/year · 7-day free trial · No credit card required
Related Reading
No credit card required
Disclaimer
This article is for informational purposes and does not constitute tax, legal, or financial advice. Tax rules vary based on your specific situation, filing status, entity structure, and jurisdiction. Always consult a qualified CPA or tax professional for guidance on your specific tax situation. IRS rules and thresholds are subject to change—verify current requirements at irs.gov before filing.