# Land and building allocation

How a rental purchase price is split between non-depreciable land and the depreciable building, what evidence supports the split, and why it comes first in a study.

## Short answer

Before anything in a cost segregation study can be classified, the purchase price has to be split between land, which is never depreciated, and everything else. The rule is simple to state and demanding to apply: when land and buildings are bought for one price, the basis is allocated between them according to their fair market values at the time of purchase. Every later number in the study depends on that split, and it is the first thing an examiner or a reviewer checks. This article explains the rule, the evidence that supports a split, the difference between land and land improvements, and the mistakes that get made. It is written for people learning the work and is general education, not tax advice.

## The rule

Publication 551 puts it directly: if you buy buildings and the land they stand on for a lump sum, allocate the basis between the land and the buildings according to their respective fair market values at the time of purchase. If you are uncertain of those values, the allocation may be based on the values assessed for real estate tax purposes. The Code adds the consequence that makes the split matter: basis is reduced by depreciation allowed or allowable, so an allocation that puts too much in the building overstates depreciation now and understates basis later.

The basis being allocated is the cost of the property plus the settlement costs that enter basis, such as legal and recording fees, surveys, transfer taxes and title insurance. Loan costs are not part of it.

## Land versus land improvements

Land is not depreciable, and the cost of land includes work that is part of the land itself, such as clearing, grading and the kind of landscaping that becomes part of the land. Land improvements are different: fences, paved parking areas and driveways, sidewalks, curbs, site drainage and depreciable landscaping are 15-year property. A study separates all three:

| Category | Examples | Treatment |
|---|---|---|
| Land | The lot; clearing, grading and site preparation that is inseparable from the land | Not depreciable |
| Land improvements | Paving, curbs, fencing, retaining walls, site lighting, drainage, depreciable landscaping | 15-year property |
| Building and its structural components | Structure, roof, exterior, general building systems | 27.5- or 39-year property |

Getting the land line right and then finding the land improvements inside "the building" are two separate steps, and both are part of the study.

## Evidence for the split, in order of strength

1. **An appraisal with a supported land value.** An appraisal prepared for the purchase or the loan usually values the site separately, often by comparable land sales. This is the evidence most reviewers want to see first.
2. **A purchase agreement allocation.** Buyer and seller sometimes agree an allocation in the contract. It is evidence of value, particularly between unrelated parties with opposing interests, but it does not bind the analysis if it is plainly unsupported.
3. **The assessor's ratio.** Publication 551 permits allocation by assessed values when fair market values are uncertain. The assessor's land and improvement values give a ratio that can be applied to the price. It is widely used because it is available everywhere; it should be documented as what it is, an assessed-value ratio, not presented as an appraisal.
4. **Comparable land sales analyzed by the practitioner.** Where no appraisal exists and the assessor's split is stale or implausible, a documented comparison of land sales in the area supports a value.
5. **Replacement cost less depreciation for the building, with land as the residual.** The cost approach from an appraisal can support the building's value and, by subtraction, the land's. It is more reliable for newer buildings.

Whatever is used, the report states the method, the source and the reasoning. A land split with no stated basis is the fastest way to lose a reviewer's confidence in everything that follows.

## Why the split comes first

- **It fixes the depreciable total.** Everything the study classifies has to reconcile to the price less land. The IRS Audit Techniques Guide lists reconciliation of allocated costs to actual costs among the elements of a quality study, and addresses the allocation of purchase price and land specifically.
- **It is the largest single number.** In many markets the land share is a substantial part of the price. An error of a few percentage points in the land line is larger than the whole personal property line in a small rental.
- **It protects the later classifications.** If the land line is unsupported, a reviewer treats every reclassified component as suspect, because the pool they were drawn from was never established.
- **It matters at sale.** Land is not depreciated and not recaptured. Basis in land carries through to the sale unchanged.

## Common mistakes

- **Using a percentage from memory.** "Land is 20 percent" is not a method. Land share varies from a small fraction in rural areas to the majority of value in dense cities.
- **Ignoring the assessor's ratio because it is inconvenient.** The ratio is permitted evidence when values are uncertain. Departing from it needs a documented reason and better evidence, not a preference for a larger building line.
- **Treating site work as land or as building by default.** Clearing and grading are land; paving and fencing are 15-year land improvements; neither belongs in the 27.5-year building line.
- **Forgetting settlement costs.** The allocable basis includes the closing costs that enter basis, allocated on the same ratio.
- **Allocating once and never revisiting.** Improvements bought later have their own basis; the original split is not reopened, but the reconciliation must include the new assets.
- **Mixing appraisal dates.** The rule is fair market value at the time of purchase. An appraisal from years later measures something else.

## When the evidence disagrees

The appraisal, the contract and the assessor rarely agree exactly. That is normal, and the study does not average them. It chooses the evidence closest to fair market value at the time of purchase, explains why the others were not used, and records the difference. A contract allocation between unrelated parties that sits within the range of the appraisal and the assessor is strong; an allocation that puts land far below both, with no land-sale evidence, is weak however convenient it is. Where the practitioner and the adviser disagree about the split, the disagreement is resolved before the report is issued, and the reasoning is kept in the file.

## A practitioner's checklist

1. Obtain the closing statement and compute the basis including allocable settlement costs.
2. Collect the appraisal, the purchase agreement and the assessor's record.
3. Choose the strongest supported evidence for land value and document why.
4. State the land value and the resulting depreciable basis in the report with the method.
5. Separate land improvements from the building with a legal reason for each item.
6. Reconcile land plus all classified assets to the basis, and disclose any difference.

## What people ask on Reddit and other forums

The searches that lead people to these threads are usually phrased "land value for depreciation", "assessor land value".

"How do I split land and building" is one of the most repeated questions on r/tax and in "cost segregation reddit" threads. From the sources below:

**"Can I use the county's land value?"** Publication 551 permits allocation by assessed values when fair market values are uncertain. Apply the assessor's ratio to your price, document it, and prefer an appraisal where one exists.

**"Is 20 percent land a safe default?"** No. Land share varies from a small fraction in rural areas to most of the value in dense cities. A percentage from memory is not a method.

**"The contract says $10,000 for land. Does that bind?"** An agreed allocation between unrelated parties is evidence of value, but it still has to be reasonable against the appraisal and the assessor's record.

**"Is landscaping land or depreciable?"** Both exist: grading and planting that become part of the land are land; landscaping with a determinable life next to a building can be a 15-year land improvement. The report should say which and why.

## Questions people also ask

### Can I just use the county assessor's land value?

Publication 551 permits allocation based on assessed values when fair market values are uncertain. Use the assessor's ratio applied to your price, document that this is what you did, and prefer an appraisal where one exists.

### Is landscaping land or a land improvement?

Both exist. Landscaping that becomes part of the land, such as initial grading and planting that will last as long as the land, is land. Landscaping with a determinable life adjacent to a building can be a 15-year land improvement. The report should say which and why.

### Does the land split affect bonus depreciation?

Indirectly. Land is not depreciable and gets no bonus depreciation; the size of the land line fixes how much basis remains for the building and the shorter-lived classes.

### What if the seller and I agreed a land value in the contract?

That agreement is evidence of value, particularly between unrelated parties. It still has to be reasonable against the appraisal and the assessor's record, and it should be documented in the study.

### Who decides the land value, the practitioner or the adviser?

The practitioner documents the evidence and proposes the allocation in the study; the adviser applies it to the return and is responsible for the position. On a contested or unusual allocation, the two should agree before the study is final.

## Sources

- https://www.irs.gov/publications/p551 — IRS Publication 551 (Rev. December 2024), Basis of Assets: allocating the basis; real property; settlement costs.
- https://www.irs.gov/publications/p946 — IRS Publication 946 (2025), How To Depreciate Property: Chapter 1, land; Chapter 4, land improvements.
- https://www.irs.gov/publications/p527 — IRS Publication 527 (2025), Residential Rental Property: Chapter 2, 15-year property.
- https://www.irs.gov/pub/irs-pdf/p5653.pdf — IRS Publication 5653, Cost Segregation Audit Techniques Guide (Rev. 2-2025): Chapter 4; Chapter 6, allocation of purchase price and land.
- https://www.law.cornell.edu/uscode/text/26/1016 — 26 U.S.C. §1016(a)(2).

## Related reading

- [The evidence a cost segregation study needs](/articles/evidence-a-cost-segregation-study-needs)
- [What a cost segregation study does](/articles/what-a-cost-segregation-study-does)
- [How reconciliation reveals errors](/articles/how-reconciliation-reveals-errors)
- [How to read a depreciation schedule](/articles/how-to-read-a-depreciation-schedule)
- [Why universal percentages fail](/articles/why-universal-percentages-fail)
- [The Practitioner Program](/program)

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Canonical: https://nbcss.org/articles/land-and-building-allocation
Published: 2026-09-25 · Last content change: 2026-09-25
Not professional advice: general educational information from the National Board of Cost Segregation Specialist (NBCSS); not accounting, tax, legal, financial, investment or engineering advice. Verify with a licensed CPA, enrolled agent, attorney or other qualified adviser before acting.