Land itself cannot be depreciated under federal tax law. The IRS treats land as having an indefinite lifespan, so it never qualifies for the annual cost-recovery deductions available to buildings, equipment, and other assets that wear out. Improvements built on the land are a different story: fences, parking lots, sidewalks, and similar additions follow their own depreciation rules and, under current law, often qualify for a full first-year deduction. The tax planning lives in the line between the dirt and what sits on it.
Why the IRS Won’t Let You Depreciate Land
IRC Section 167 allows a depreciation deduction only for property subject to “exhaustion, wear and tear (including a reasonable allowance for obsolescence).”1Office of the Law Revision Counsel. 26 U.S. Code 167 – Depreciation Land doesn’t wear out or become obsolete. A parking lot cracks. A fence rots. The earth underneath stays. IRS Publication 946 states the rule directly: “You cannot depreciate the cost of land because land does not wear out, become obsolete, or get used up.”2Internal Revenue Service. Publication 946 (2025), How To Depreciate Property
To qualify for depreciation under the Modified Accelerated Cost Recovery System, an asset must have a determinable useful life. Land has none, so MACRS simply doesn’t apply. The same reasoning keeps land out of Section 179 expensing, which explicitly excludes both land and land improvements.3Internal Revenue Service. Publication 946 (2025), How To Depreciate Property – Section: What Property Does Not Qualify? Every dollar attributed to raw earth sits frozen in your cost basis until you sell.
What You Can Depreciate: Land Improvements
Additions built on or into the land qualify for depreciation because they deteriorate. Publication 946 classifies these as 15-year property under the General Depreciation System, including shrubbery, fences, roads, sidewalks, and bridges.4Internal Revenue Service. Publication 946 (2025), How To Depreciate Property – Section: Which Property Class Applies Under GDS? Paved parking areas, drainage facilities, and retaining walls fall in the same class.
Landscaping can be depreciated too, but only when it’s tied closely enough to a building that replacing the building would require destroying the plantings. Bushes against a foundation pass this test. Trees along the outer edge of the lot, which would survive demolition, generally don’t.4Internal Revenue Service. Publication 946 (2025), How To Depreciate Property – Section: Which Property Class Applies Under GDS?
Bonus Depreciation for Improvements Placed in Service in 2026
The One Big Beautiful Bill Act permanently restored 100% bonus depreciation for qualified property acquired after January 19, 2025.5Internal Revenue Service. Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction Amended as Part of the One Big Beautiful Bill Under IRC Section 168(k), qualified property covers any MACRS asset with a recovery period of 20 years or less.6Office of the Law Revision Counsel. 26 U.S. Code 168 – Accelerated Cost Recovery System Land improvements sit at 15 years, so they fit.
The practical effect is large. Install a $200,000 parking lot in 2026, and you can deduct the entire $200,000 the year it’s placed in service rather than spreading it across 15 years. The old phase-down (60% for 2024, 40% under the earlier schedule for 2025) is gone, and the 100% rate is permanent rather than set to expire.5Internal Revenue Service. Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction Amended as Part of the One Big Beautiful Bill
One boundary matters here. Land improvements qualify for 100% bonus depreciation but remain ineligible for Section 179. Publication 946 lists “swimming pools, paved parking areas, wharves, docks, bridges, and fences” as specific examples of land improvements excluded from Section 179.3Internal Revenue Service. Publication 946 (2025), How To Depreciate Property – Section: What Property Does Not Qualify? For most owners this is a technicality since bonus depreciation delivers the same first-year deduction, but it can matter when you’re choosing which assets to run through which provision.
Site Preparation and Demolition Costs
Not every dollar spent on the ground before you build qualifies for depreciation. The treatment depends on what the work is connected to.
General site preparation that makes raw land usable for any purpose, such as grading, clearing brush, and leveling terrain, is added to the non-depreciable land basis. Those costs are capitalized and recovered only when you sell.7Internal Revenue Service. Publication 551 – Basis of Assets There is no annual deduction for permanently reshaping the earth.
Site work tied to a specific building follows the building’s depreciation schedule instead. Digging a foundation or trenching for utility lines that serve one particular structure is depreciated over 27.5 years for residential rental property8Internal Revenue Service. Publication 527 (2025), Residential Rental Property and 39 years for nonresidential property.9Internal Revenue Service. Publication 946 (2025), How To Depreciate Property – Section: Recovery Periods Under GDS Misclassifying general grading as building cost, or building-specific site work as land, can trigger the 20% accuracy-related penalty on the resulting underpayment.10Office of the Law Revision Counsel. 26 U.S.C. 6662 – Imposition of Accuracy-Related Penalty on Underpayments
Demolition is treated more strictly still. IRC Section 280B bars any deduction for the cost of tearing down a structure and bars any loss on the demolished building. Both the demolition cost and any remaining basis in the old structure are added to the basis of the land, not the new building.11Office of the Law Revision Counsel. 26 U.S. Code 280B – Demolition of Structures Demolition feels like a construction expense, but the code puts it on the land.
Splitting the Purchase Price Between Land and Building
When you buy property that includes both land and a building, you have to allocate the purchase price between them. Only the building portion is depreciable, so this allocation controls the size of your annual deduction.
The most common method uses local property tax assessments, which list separate assessed values for land and improvements. Divide the assessed land value by the total assessed value to get a percentage, then apply that percentage to your purchase price. The IRS depreciation FAQ gives an example: if the assessment shows improvements at 75% and land at 25%, a buyer who paid $100,000 assigns $25,000 to land and depreciates the remaining $75,000.12IRS. Depreciation – Frequently Asked Questions Closing fees, title insurance, and legal expenses are allocated using the same ratio.7Internal Revenue Service. Publication 551 – Basis of Assets
A professional appraisal is an alternative when tax assessments look unreliable or when you expect scrutiny. Appraisals hold up better in an audit because the appraiser inspects the property and documents the reasoning. Whichever method you use, keep the records. If you can’t substantiate the split, the IRS will make one for you, and their version typically assigns more value to the non-depreciable land.
What Happens When You Sell: Depreciation Recapture
Every depreciation deduction you take on improvements reduces your adjusted basis in the property. When you sell, the IRS takes some of that benefit back through depreciation recapture.
Buildings and structural improvements generally fall under Section 1250. The portion of the gain attributable to prior depreciation, called unrecaptured Section 1250 gain, is taxed at a maximum rate of 25%, above the standard long-term capital gains rates of 0% to 20%.13Office of the Law Revision Counsel. 26 U.S. Code 1250 – Gain From Dispositions of Certain Depreciable Realty Some land improvements, depending on their characteristics, are classified as Section 1245 property instead, and Section 1245 recapture is taxed at ordinary income rates, which can be higher than the 25% ceiling on Section 1250 gain. The larger your first-year bonus deduction, the larger the recapture pool waiting at sale.
When Land Contains Natural Resources: Depletion
Land can’t be depreciated, but it can be depleted, which matters for owners of mineral rights, timber tracts, and oil and gas properties. Depletion is the extraction-industry counterpart to depreciation: it recovers the cost of a natural resource as the resource is physically removed.
The basis for cost depletion under IRC Section 611 covers the mineral or timber value but specifically excludes the residual value of the land itself once extraction ends.14eCFR. 26 CFR 1.612-1 – Basis for Allowance of Cost Depletion Even with depletion in the picture, the underlying land value stays non-deductible.
An owner of resource-bearing property ends up with three basis buckets: the land’s residual value (recovered only at sale), the deposit itself (depletable as it’s extracted), and any surface improvements (depreciable under MACRS). Each follows a different cost-recovery path, and getting the allocation right at the front end determines what you can deduct for the life of the property.