The Internal Revenue Service allows you to depreciate assets that are used in a trade or business according to their useful lives. While the IRS considers land to typically have an indefinite life, many of the things that you do to improve the land gradually wear out. As such, some of those improvements can be depreciated.
Land and Depreciation
A large part of the complexity in determining which land improvements can be depreciated and which cannot is that the land itself is not depreciable. Depreciation is an accounting tool to simulate the gradual deterioration of assets as they age. Barring erosion or major losses, land doesn't deteriorate, so it can't be depreciated. A ghost town is an excellent example of this. While the buildings have fallen into disrepair, the underlying land is still there.
Just about anything that you do to a piece of land is an improvement. The IRS's manual on depreciation defines everything from roads and bridges to shrubbery as a land improvement. The challenge is that improvements typically get depreciated with the same life as the asset that they improve. With this in mind, improvements that exist to benefit the land itself typically aren't depreciable, because the land that they improve isn't depreciable. However, improvements that help the land serve other purposes typically are. One good example of this is improvements to land that make it possible to add buildings, like installing curbs and streets. The land doesn't need those improvements, but buildings erected on it do, so they're depreciable to the extent that they support building.
Improvement Depreciable Life
If your land improvement is depreciable, the IRS lets you choose between two recovery periods for it. The general depreciation system assigns a 15-year recovery period to land improvements. If your company uses the less-common alternative depreciation system, you will have to depreciate land improvements over a 20-year period, instead.
A golf course is an excellent example of how the differences between depreciable and non-depreciable land improvements play out. Most of the work that a golf course designer does is not depreciable, because it has to do with laying out or landscaping the land. However, highly specialized parts of the golf course like greens or bunkers that have underground drainage systems are depreciable. Furthermore, the costs to prepare the land for installation of those systems are also depreciable as land improvements.
- IRS: Publication 946 - How to Depreciate Property
- IRS: Depreciable Golf Course Land Improvements and the Impact of Rev. Rul. 2001-60
- Texas A&M University Real Estate Center: Filling, Grading, Excavating -- Land Improvements May Yield Deductions
- Accounting Tools: How Do I Account for Land Improvements?
- Lincoln Institute of Land Policy. "Assessing the Theory and Practice of Land Value Taxation," Page 2. Accessed June 17, 2020.
- W.J. McCluskey, Owiti A. K'Akumu, and Washington Olima, "Land Value Taxation -- Chapter One: Theoretical Basis of Land Value Taxation," Page 3. Ashgate Publishing, 2005. Accessed June 17, 2020.
- Lincoln Institute of Land Policy. "Land Value Tax Holds Promise for Cash-Strapped Cities and Towns." Accessed Feb. 5, 2020.
- Angus Stevenson and Maurice Waite. "Concise Oxford English Dictionary," Page 18. OUP Oxford, 2011. Accessed June 17, 2020.
- Wisconsin Department of Revenue. "2020 Property Assessment Process Guide for Municipal Officers," Page 33-34. Accessed June 17, 2020.
- Tax Foundation. "Reviewing the Deadweight Loss Effects of High Tax Rates." Accessed Feb. 5, 2020.
Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.