When purchasing commercial or investment real estate, such as an apartment building, you often pay a single flat amount for the land, buildings, and other upgrades. Therefore, there is no breakdown of costs.
Land does not depreciate because it does not wear out. As a result, the land is worthless in terms of depreciation.
What you'll need is a system for allocating that lump cash to land, buildings, improvements, and equipment.
The property owner must first make a factual determination when allocating costs to land and structures for tax purposes.
The IRS offers no guidance on how to distribute land and building values. It simply states: "To calculate the foundation for depreciation of the buildings, divide the cost between the land and the buildings. The proportion of the total cost that you allocate to each asset is the ratio of that asset's fair market value to the total cost of the property at the time you buy it."
This allocation is applied in various ways since you are not obligated to employ any specific method—just one that is appropriate.
If you have any questions regarding cost allocation or any other tax concerns, contact us.
We're Here to Help
Get advice from our experienced network of financial managers.
If you Value our Blog, We have an ask.
We spend hours researching data to help you understand your finances and taxes, including historical context, issues, and solutions. Our goal is to empower people to improve their relationship with money. Please consider a $3 donation today.
Spencer Accounting Group, LLC does not provide investment, tax, legal, or retirement advice or recommendations in these blogs. The information presented here is not specific to any individual's personal circumstances.
Keana Spencer is an Accountant, Entrepreneur, and Educator to her clients, with a strong passion. Keana has over 10 years of experience and through her practice, she is a source of knowledge and strategies to her clients.