Can You Write Off a Land Purchase for Business?

You cannot write off a land purchase for business as a current tax deduction. The IRS treats land as a capital asset with an indefinite useful life, so the price you pay sits on your books as basis and is only recovered when you sell.¹ The real tax benefits come from three other places: ongoing carrying costs you can deduct each year, improvements built on the land that you can depreciate (often immediately), and the capital gain treatment available when you eventually sell.

Why the Purchase Price Itself Is Not Deductible

Depreciation exists to account for an asset wearing out. Buildings deteriorate, equipment breaks down, vehicles accumulate mileage. Land does none of that. Because its useful life is considered indefinite, the IRS lists land as property that cannot be depreciated.¹ No annual deduction, no accelerated write-off, and no Section 179 election. The purchase price gets capitalized, meaning it reduces no income in the year you buy.

You recover that cost at disposition. When you sell, you subtract your cost basis from the sale price to determine taxable gain or loss. If you buy a $500,000 parcel of vacant land, that $500,000 stays locked in basis until the day you transfer the property to someone else.

What Gets Added to Your Land’s Basis

The sticker price is only the starting point. Transaction and site-preparation costs also have to be capitalized. You cannot deduct these in the year you pay them, but every dollar added to basis reduces the taxable gain at sale.

Transaction fees: attorney fees for the purchase agreement, title insurance, broker commissions, recording fees, and transfer taxes
Site preparation: surveys, clearing, grading, leveling, and debris removal to make the property usable

Demolition Costs Go Into Land Basis

If you buy a property and tear down an existing structure, every dollar spent on the demolition is added to the land’s basis. Any remaining undepreciated value of the demolished building goes into the land basis as well. None of it is deductible.² The rule applies regardless of the building type or your original intent when you bought. If you planned to renovate and later changed course, the demolition still capitalizes.

Ongoing Costs You Can Deduct Each Year

Even though the purchase price is locked in basis, several holding costs are currently deductible.

Property taxes paid on land used in your trade or business are deductible as an ordinary business expense. The individual SALT cap does not apply to property tax paid on business property; it comes off on your business return rather than as a personal itemized deduction.

Interest on a loan used to acquire business land is generally deductible as a business expense, subject to the business interest limitation under Section 163(j). That provision caps the deduction at business interest income plus 30% of adjusted taxable income for businesses above the gross receipts threshold.³ Small businesses under the threshold deduct interest without this cap. If you hold the land purely as an investment rather than for active business use, the interest deduction is limited to your net investment income for the year.

The Section 266 Election

If deducting these carrying charges in the current year does not help you, perhaps because you already have losses or low taxable income, you can elect under Section 266 to capitalize them into the land’s basis instead.⁴ The election is annual, and you can pick which costs to capitalize. You make it by attaching a statement to your return that identifies the property and cites Section 266. Higher basis means lower gain at sale.

Improvements on the Land Are Depreciable

While the land itself is permanently non-depreciable, things built on or attached to it generally are. Parking lots, fences, sidewalks, drainage systems, retaining walls, exterior lighting, and access roads all have finite useful lives. The IRS classifies these land improvements as 15-year property under the Modified Accelerated Cost Recovery System.¹ By comparison, the building shell depreciates over 39 years for commercial property or 27.5 years for residential rental. A parking lot delivers deductions more than twice as fast as the building above it.

Cost Segregation Studies

When you buy an improved property, the purchase price covers everything in one lump sum: land, building, and all the individual components. A cost segregation study is an engineering analysis that breaks that price into its separate pieces. The goal is to shift as much value as defensibly possible out of the 39-year building category and into shorter-lived categories like 15-year land improvements, 7-year personal property, or 5-year assets. The IRS expects the allocation to be supported by an engineering report if the return is examined.

100% Bonus Depreciation Is Back

Under the One Big Beautiful Bill Act, Congress permanently reinstated the 100% additional first-year depreciation deduction for qualified property acquired after January 19, 2025.⁵ A qualifying 15-year land improvement placed in service in 2026 can be deducted in full in year one rather than spread over 15 years. This reverses the Tax Cuts and Jobs Act phasedown, which had dropped bonus depreciation to 60% for 2024 and 40% for 2025.

Section 179 Does Not Cover Land Improvements

A common misconception worth clearing up: Section 179 expensing does not apply to land or land improvements. Publication 946 explicitly excludes them.¹ Fences, paved parking areas, docks, bridges, and similar assets are off the table for 179. They go through bonus depreciation instead, which at 100% is actually more generous because it has no dollar cap.

If You Buy Land to Subdivide and Sell

Everything above assumes you bought the land to use in your business or hold as an investment. Developers and builders who buy land to subdivide and sell to customers play by a different set of rules. For them, land is inventory, not a capital asset.

When land is inventory, acquisition and development costs get capitalized into cost of goods sold under the Uniform Capitalization Rules of Section 263A.⁶ That includes the purchase price, loan interest, direct development costs, and a share of indirect overhead. Nothing comes off until the specific lot or finished property sells.

The line between dealer and investor is a facts-and-circumstances call. The IRS weighs how long you held the property, why you bought it, how many properties you have bought and sold, whether you made significant improvements like subdividing or adding infrastructure, and whether real estate sales are your regular business or a one-off. The classification matters: a dealer pays ordinary income tax on every sale and cannot use a 1031 exchange, while an investor qualifies for long-term capital gains rates and can defer through like-kind exchanges.

Recovering Your Basis at Sale

The sale is where the capitalized cost finally gets used.

Section 1231 Treatment

Business real property held for more than one year is Section 1231 property. If total Section 1231 gains for the year exceed Section 1231 losses, the net gain is treated as long-term capital gain, taxed at the preferential rates of 0%, 15%, or 20% depending on income.⁷ If losses exceed gains, they are treated as ordinary losses, which offset ordinary income. Watch the five-year lookback rule: if you claimed net Section 1231 losses in any of the prior five years, current-year gain is recharacterized as ordinary income to the extent of those prior losses.

Depreciation Recapture on Improvements

Land itself has no depreciation to recapture, so pure land gain is taxed at regular capital gains rates. If you depreciated land improvements or buildings, the picture changes. For post-1986 real property depreciated using MACRS straight-line, standard Section 1250 recapture is uncommon, but gain attributable to prior depreciation on real property is taxed at a maximum rate of 25% under the unrecaptured Section 1250 gain rules.⁸

Deferring Gain With a 1031 Exchange

Selling business or investment land and buying similar real property allows you to defer the entire gain through a like-kind exchange under Section 1031. Basis from the old property carries over to the new one, reduced by any cash received.⁹ The tax is pushed forward rather than eliminated. You have 45 days from the sale of the old property to identify replacement property and 180 days to close. Miss either deadline and the exchange fails, making the full gain taxable in the year of sale. Dealer inventory does not qualify, which is another reason the dealer-versus-investor question matters.

1
Internal Revenue Service. Publication 946 – How To Depreciate Property
2
Office of the Law Revision Counsel. 26 US Code 280B – Demolition of Structures
3
Office of the Law Revision Counsel. 26 US Code 163 – Interest
4
Office of the Law Revision Counsel. 26 USC 266 – Carrying Charges
5
Internal Revenue Service. Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction Amended as Part of the One Big Beautiful Bill
6
Office of the Law Revision Counsel. 26 US Code 263A – Capitalization and Inclusion in Inventory Costs of Certain Expenses
7
Office of the Law Revision Counsel. 26 USC 1231 – Property Used in the Trade or Business and Involuntary Conversions
8
Office of the Law Revision Counsel. 26 US Code 1250 – Gain From Dispositions of Certain Depreciable Realty
9
Office of the Law Revision Counsel. 26 USC 1031 – Exchange of Real Property Held for Productive Use or Investment