What's the Depreciable Basis?

The depreciable basis is the portion of your property’s basis that can be depreciated under the tax code. For a residential rental property, the simplified calculation looks like this:

In other words, an apartment building purchased for $1,200,000 that sits on $400,000 worth of land would have a depreciable basis of $800,000.

You subtract the land value because land is a non-depreciable asset. Land doesn’t wear down or become obsolete the way a building, vehicle, or factory machine does. The building and many of its components have a limited useful life; the land beneath them generally does not.

In our example, I provided the $400,000 land value rather nonchalantly. In the real world, however, establishing an accurate and defensible land value is extremely important. Your depreciable basis determines how much depreciation you can claim over the property’s recovery period—and how much of that basis a cost segregation study can reclassify into shorter-lived asset classes. An underestimated land value creates a larger depreciable basis and, therefore, larger depreciation deductions. That may sound appealing, but an allocation that cannot be supported may create problems if the return is ever examined.

It is also worth noting that a property’s basis is not always identical to its purchase price. Certain capitalized acquisition costs and later improvements may increase the basis, while prior depreciation and other adjustments may reduce it. For a newly purchased property, however, the purchase price is generally the starting point.

Getting an Accurate Land Value

Part of a cost segregation specialist’s job may be establishing a reasonable land value so the property’s depreciable basis can be calculated correctly. There are several ways to do this.

The strongest support generally comes from a professional appraisal. An appraiser will review comparable properties, recent land sales, location, zoning, market conditions, and other relevant factors to determine a supportable value for the land. When the land allocation is significant or potentially questionable, a professional appraisal can provide the clearest support.

Many counties across the United States also publish separate assessed values for land and improvements through their county assessor websites. These assessments can provide a useful starting point, but the listed values may not reflect the property’s current fair market value or actual purchase price.

One common approach is to use the assessor’s land-to-total-value ratio and apply that percentage to the property’s actual basis. For example, if the county assessment assigns 30% of the property’s total value to land, that ratio may be applied to the property’s purchase price—provided the assessment is current, reasonable, and consistent with local market evidence.

Recent sales of comparable vacant land may also help support the allocation. Ideally, the final land value should be based on more than a convenient number. It should be backed by an appraisal, assessor data, comparable sales, or a combination of reliable sources.

Once the land value has been established, it is subtracted from the property’s total basis to determine the depreciable basis. That is the amount allocated between the building and its depreciable components during a cost segregation study—including the 5- and 15-year property that may qualify for bonus depreciation.

An absurdly low and indefensible land valuation may attract unwanted attention from the IRS. At the same time, an unnecessarily high land value reduces the depreciation deductions legally available to the property owner. The goal is not to force the lowest possible number—it is to arrive at a reasonable, well-supported allocation that gives the taxpayer every deduction they are entitled to while remaining defensible under examination.