Land is not Section 1250 property. Section 1250 applies only to depreciable real property, and land cannot be depreciated because it has no determinable useful life. That single fact keeps land outside the Section 1250 classification and, with it, outside the depreciation recapture rules that hit buildings and other improvements when they are sold.
What Section 1250 Actually Covers
The federal tax code defines Section 1250 property as any real property that is or has been subject to a depreciation allowance, excluding anything already classified as Section 1245 property, which covers most tangible personal property like equipment and machinery.1Office of the Law Revision Counsel. 26 USC 1250 – Gain From Dispositions of Certain Depreciable Realty In practice that means buildings and their structural components: commercial offices, apartment complexes, warehouses, and the heating, plumbing, and elevator systems inside them. What ties these assets together is that they wear out, which is why the IRS lets owners deduct a portion of their cost each year as depreciation.
The classification only matters when the property changes hands. At that point Section 1250 exists to recoup part of the tax benefit the owner received from those depreciation deductions. No depreciation, no Section 1250 exposure.
Why Land Is Excluded
The IRS states the reasoning plainly: “You cannot depreciate the cost of land because land does not wear out, become obsolete, or get used up.”2Internal Revenue Service. Publication 946 – How To Depreciate Property A building eventually needs a new roof, updated wiring, or outright demolition. The ground beneath it does not deteriorate on any similar schedule. Depreciation requires a determinable useful life, land has none, so land generates no depreciation deductions and cannot be Section 1250 property.
That exclusion creates a practical obligation at every real estate purchase. You have to split the price between the land and the depreciable improvements. You cannot depreciate the whole cost. The IRS expects a reasonable allocation method, and most taxpayers rely on one of two: the local property tax assessment, which usually breaks the assessed value into land and improvement components, or a professional appraisal. Either way, the split needs to be defensible.
Getting it wrong is one of the more common audit triggers for real estate owners. Depreciating a portion of the price that belonged to land means claiming deductions you were never entitled to, and the IRS can impose an accuracy-related penalty equal to 20% of the resulting tax underpayment.3Office of the Law Revision Counsel. 26 US Code 6662 – Imposition of Accuracy-Related Penalty on Underpayments
Land Improvements Are Not the Same as Land
This is where the classification often gets muddled. The land itself is not depreciable, but many of the things you add to it are. Paving a parking lot, installing fencing, building a retaining wall, adding drainage systems, or laying sidewalks all create what the IRS calls land improvements. These have a determinable useful life and are depreciated, typically over a 15-year recovery period under the Modified Accelerated Cost Recovery System.2Internal Revenue Service. Publication 946 – How To Depreciate Property
Because land improvements are depreciable real property, they can fall under Section 1250. When you sell a property that includes depreciated land improvements, the depreciation you claimed on those improvements can be subject to the same recapture rules that apply to buildings. Land and the things attached to land are two different categories for tax purposes, and treating them as one costs money on both ends: overstated deductions during ownership, understated recapture at sale.
How the Sale of Land Is Actually Taxed
Because land generates no depreciation, there is no depreciation to recapture when you sell it. The full profit above your cost basis is a capital gain, and the rate depends on how you held the property.
Land held purely as an investment is a capital asset, taxed under the same rules that apply to stocks or bonds.4Office of the Law Revision Counsel. 26 US Code 1221 – Capital Asset Defined Land used in a trade or business and held for more than one year qualifies as Section 1231 property, which generally gives owners the best of both worlds: gains taxed at long-term capital gains rates, and losses deductible as ordinary losses.5Office of the Law Revision Counsel. 26 USC 1231 – Property Used in the Trade or Business and Involuntary Conversions
If you held the land for more than a year, the gain qualifies for long-term capital gains rates. For 2026 those brackets are:6Internal Revenue Service. Topic No. 409, Capital Gains and Losses
- 0% on taxable income up to $49,450 for single filers, $98,900 for married couples filing jointly, or $66,200 for heads of household.
- 15% on taxable income above those thresholds but below $545,500 (single), $613,700 (joint), or $579,600 (head of household).
- 20% on taxable income exceeding those upper limits.
Business owners who sell land used in their operations report the transaction on Form 4797.7Internal Revenue Service. Instructions for Form 4797 – Sales of Business Property Investors selling land held outside a business report the gain on Schedule D. In both cases, keep records of the original purchase price, closing costs, and any capitalized expenses that increased your basis. Every dollar added to basis is a dollar less of taxable gain, and unlike a building, land has no annual depreciation chipping the basis down.
What Happens at Purchase: The Allocation Between Land and Building
Because land is excluded from Section 1250, the allocation you make at purchase has consequences on both ends of ownership. The higher the portion assigned to the building, the larger your annual depreciation deductions, but the larger the recapture bill when you sell, since unrecaptured Section 1250 gain is taxed at a maximum rate of 25%.8Office of the Law Revision Counsel. 26 USC 1 – Tax Imposed The higher the portion assigned to land, the smaller the annual deductions but the smaller the recapture exposure later.
Inflating the building portion to boost near-term deductions catches up with you at sale, and if the IRS finds the allocation unreasonable it can also trigger the 20% accuracy-related penalty.3Office of the Law Revision Counsel. 26 US Code 6662 – Imposition of Accuracy-Related Penalty on Underpayments A supportable split, based on the assessor’s ratio or an appraisal, is what keeps both problems at bay.
Demolition Costs Go Onto the Land
Tearing down a building to use the underlying land does not produce a deduction, and it does not produce a loss for the undepreciated value of the demolished structure. Federal law requires that any amount spent on demolition, plus any remaining basis in the demolished building, be added to the cost basis of the land.9Office of the Law Revision Counsel. 26 US Code 280B – Demolition of Structures
Because land is not depreciable, those capitalized costs sit on your books producing no annual tax benefit. You recover them only when you sell, when the higher basis reduces your taxable gain. Contractor fees, debris removal, lot grading, and the remaining book value of the old building all fold into the land’s basis. If you build something new on the site, the new construction is a separate depreciable asset; the demolition costs stay with the land.
Inherited Land and the Step-Up in Basis
When land is inherited, its basis resets to fair market value on the date of the previous owner’s death.10Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent This step-up wipes out, for tax purposes, all the appreciation that occurred during the original owner’s lifetime. If a parent bought land for $50,000 and it was worth $300,000 at their death, the heir’s basis becomes $300,000. Selling for $320,000 produces $20,000 of taxable gain, not $270,000.
The rule applies to any inherited asset, but it matters especially for land. A building’s basis is adjusted every year through depreciation. Land has no such adjustment mechanism during ownership, so the step-up at inheritance is effectively the only reset the land’s tax cost ever gets. Documenting the date-of-death value with an appraisal is what makes that reset stick if it is ever questioned.