How to Depreciate Land Improvements: MACRS, Bonus, and Form 4562

To depreciate land improvements, you separate the improvement’s cost from the non-depreciable land, assign it a 15-year recovery period under MACRS, and deduct it using the 150% declining balance method (with a straight-line switch built in).¹ For qualified property acquired after January 19, 2025, the One, Big, Beautiful Bill permanently restored 100% bonus depreciation, so many owners can write off the full cost of a parking lot, fence, or similar improvement the year it goes into service.² Land itself is never depreciable because it does not wear out.

What Counts as a Depreciable Land Improvement

The IRS treats the soil, plus the cost of clearing, grading, and basic landscaping done to prepare raw land, as part of the land’s non-depreciable basis. Physical additions that serve a business purpose and will eventually wear out are a different matter. Common 15-year improvements include:

Paved surfaces such as parking lots, driveways, roads, and sidewalks
Fences, retaining walls, bridges, and wharves
Drainage facilities, sewers, and outdoor lighting
Shrubbery and plantings, but only when so closely associated with a depreciable building that replacing the building would destroy them

That last item catches people. Hedges along a property line with no tie to a building are part of the land and stay in non-depreciable basis. The same hedges planted against a depreciable building, where demolition would kill them, are depreciable improvements.¹

Repair or Capital Improvement

Before you set up any depreciation schedule, decide whether the expenditure is a repair you can deduct now or a capital improvement you have to write off over time. The IRS uses the BAR test: betterment, adaptation, or restoration.³ Capitalize the cost if it:

Fixes a pre-existing defect, enlarges the property, or materially increases capacity or output (betterment)
Replaces a major component, returns a non-functional asset to working order, or rebuilds the property to like-new condition (restoration)
Converts the property to a use different from the one you originally placed it in service for (adaptation)

Patching potholes is a repair. Tearing out and repaving an entire parking lot is a restoration you capitalize and depreciate over 15 years, unless you elect bonus depreciation.

For smaller items, the de minimis safe harbor election lets you deduct property costing $2,500 or less per invoice (or per item) without capitalizing, provided you have a written policy in place and apply it consistently. Businesses with audited financial statements can use a $5,000 threshold instead.

Establishing Your Cost Basis and Placed-in-Service Date

For an improvement you build, basis is the amount you paid for materials, labor, installation, permits, and related fees, plus sales tax and delivery charges.¹

When you buy land with improvements already on it in a single lump-sum transaction, split the price between the non-depreciable land and each improvement. Property tax assessments are a common starting point because many jurisdictions value land and structures separately. A professional appraisal carries more weight if the IRS challenges your allocation.

You also need the placed-in-service date, which is the day the improvement is ready and available for its intended use. A parking lot is placed in service when paving is finished and cars can use it, not when you signed the contract and not when the first vehicle pulls in.¹

The MACRS Mechanics for 15-Year Property

Under the General Depreciation System, most land improvements are 15-year property and use the 150% declining balance method, which front-loads deductions in the early years and switches automatically to straight-line when that produces a larger deduction.¹⁴

You can instead elect straight-line over the same 15-year period. Equal annual deductions are useful when you expect higher income later or want predictable book depreciation. The election is made class by class: choosing straight-line for one parking lot forces straight-line on every other 15-year asset you place in service that year.¹

The Alternative Depreciation System is the third option, using straight-line over a 20-year recovery period. ADS is mandatory for property used predominantly outside the United States and in certain other situations, and it can be elected voluntarily. The tradeoff is a slower deduction stream.

Half-Year and Mid-Quarter Conventions

MACRS will not let you claim a full year of depreciation for an asset placed in service partway through the year. The default half-year convention treats every asset as placed in service at the midpoint of the year regardless of the actual date, so you get half a year in year one and half a year in year 16.¹

If more than 40% of all the depreciable property you place in service that year is placed in service in the last three months, the mid-quarter convention applies instead. Each asset is then treated as placed in service at the midpoint of its actual quarter. This prevents year-end purchases from harvesting a half-year of depreciation for a few weeks of use.

Bonus Depreciation Under the OBBB

The 2017 Tax Cuts and Jobs Act put 100% bonus depreciation on a phase-down starting in 2023. The One, Big, Beautiful Bill, signed in 2025, reversed that and permanently restored 100% bonus depreciation for qualified property acquired after January 19, 2025.² Fifteen-year land improvements are qualified property.

The practical effect is large. A $200,000 parking lot paved in June 2026 produces a $200,000 depreciation deduction on the 2026 return instead of a schedule that stretches across 15 years. The IRS issued Notice 2026-11 confirming that taxpayers can rely on existing bonus depreciation regulations when applying the new law.²

Bonus depreciation has no dollar cap and no taxable income limit. A deduction that exceeds business income can create a net operating loss that carries forward. You can also elect out of bonus depreciation and depreciate the asset over 15 years, which some owners prefer when they expect much higher income in later years. The election out applies to every asset in the same class placed in service that year.⁴

Section 179: Usually Not Available for External Improvements

Section 179 lets you deduct qualifying property in the year it goes into service. For 2026, the statutory base limits are a $2,500,000 maximum deduction with the phase-out beginning at $4,090,000 in total qualifying property placed in service, both subject to annual inflation adjustments.⁵

Section 179 applies to tangible personal property and to “qualified real property,” which is narrowly defined. Qualified real property covers interior improvements to nonresidential buildings and specific building systems: roofs, HVAC, fire protection, and security systems.⁶ Parking lots, sidewalks, and landscaping are not on that list. Some land improvements can qualify as tangible personal property when used as an integral part of manufacturing, production, or certain utility services (a drainage system at a manufacturing plant, for example), but for most commercial owners, bonus depreciation is the more reliable first-year write-off for external improvements.

Two other Section 179 limits apply if you do qualify: the deduction cannot exceed taxable income from the active conduct of a trade or business (unused amounts carry forward), and once made, the election is irrevocable.⁵

Reporting on Form 4562

Depreciation is reported on Form 4562, attached to whatever return the business files: Schedule C for sole proprietors, Form 1065 for partnerships, Form 1120 for C corporations, or Form 1120-S for S corporations.⁷ Regular MACRS deductions for land improvements go in Part III. Bonus depreciation goes in Part II (Special Depreciation Allowance). Section 179 deductions go in Part I. File Form 4562 in any year you first place depreciable property in service or claim a Section 179 deduction; property already being depreciated from prior years does not generally need a detailed restatement, but the totals still flow to the return.⁸

You still have to keep the full depreciation schedule in your permanent records even when you do not attach it: original cost, method and recovery period, date placed in service, and cumulative depreciation each year. You will need every piece of that when you sell or if the IRS audits the return.⁸

Fixing Missed Depreciation

If you never claimed depreciation on a land improvement in prior years, the fix is not an amended return. File Form 3115, Application for Change in Accounting Method, to move from an impermissible method (not depreciating) to the correct one. This change falls under automatic consent procedures, so you do not wait for IRS approval.⁹

The correction runs through a Section 481(a) adjustment, which captures every year of depreciation you should have claimed and lets you take the total as a single catch-up deduction. When the adjustment is negative, meaning you under-claimed, you take the full catch-up in the year of change rather than spreading it. Attach the original Form 3115 to your timely filed return for that year and send a copy to the IRS National Office by the same filing deadline.⁹

This is worth acting on. The IRS taxes you at sale on depreciation “allowed or allowable,” so even depreciation you never actually deducted still comes back as recapture. Skipping it during ownership gives you the worst of both outcomes: no tax benefit while you hold the property and full recapture when you sell.

What Happens When You Sell

Selling property that includes depreciated land improvements triggers recapture. Gain attributable to depreciation previously claimed (or allowable) is recaptured and taxed as ordinary income, up to the amount of depreciation taken.¹⁰ Any gain beyond that amount is Section 1231 gain, which qualifies for long-term capital gains rates if you held the property more than a year.

The rate depends on classification. Land improvements treated as Section 1245 property (certain tangible property used in manufacturing, production, or similar activities) face full recapture at ordinary income rates on prior depreciation.¹¹ Improvements that qualify as Section 1250 property (depreciable real property) get a more favorable 25% rate on unrecaptured depreciation. Some land improvements can fall into either category depending on the specific asset and how it was used.

Adjusted basis at sale equals original cost minus all depreciation claimed or allowable. If you bought a property for $500,000, allocated $100,000 to improvements, and took $60,000 in depreciation, the adjusted basis on the improvements is $40,000. Selling that improvements portion for $120,000 produces an $80,000 gain: $60,000 subject to recapture and $20,000 treated as Section 1231 gain.¹⁰

If you used bonus depreciation or Section 179 to write off the entire cost in year one, the full deduction is subject to recapture at sale. The IRS instructions specifically note that gain on disposition is generally recaptured as ordinary income up to the amount of depreciation previously allowed, including any special depreciation allowance.⁸ Accelerated depreciation is still worthwhile in most cases; you take the tax savings up front and only owe recapture if and when you sell at a gain, and the time value of that deferral is real.

1
Internal Revenue Service. Publication 946 (2025), How To Depreciate Property
2
Internal Revenue Service. Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction Amended as Part of the One, Big, Beautiful Bill
3
Internal Revenue Service. Tangible Property Final Regulations
4
Office of the Law Revision Counsel. 26 USC 168 – Accelerated Cost Recovery System
5
Office of the Law Revision Counsel. 26 USC 179 – Election To Expense Certain Depreciable Business Assets
6
Internal Revenue Service. Instructions for Form 4562 (2025)
7
Internal Revenue Service. About Form 4562, Depreciation and Amortization
8
Internal Revenue Service. 2025 Instructions for Form 4562
9
Internal Revenue Service. Instructions for Form 3115, Application for Change in Accounting Method
10
Internal Revenue Service. Publication 544 (2025), Sales and Other Dispositions of Assets
11
Office of the Law Revision Counsel. 26 USC 1245 – Gain From Dispositions of Certain Depreciable Property