Land vs building value: how to split a rental purchase price for depreciation

Why you have to split the price at all

Land does not wear out, become obsolete or get used up, so the IRS does not let you depreciate it. Publication 527 says you cannot depreciate the cost of land, and that costs such as clearing, grading, planting and landscaping are usually part of the cost of land. A building does wear out, so its cost is recovered a little each year.

When one price buys both, Publication 551 and Publication 527 tell you to divide the cost between the land and the buildings. The depreciable basis of the building is what is left after the land share comes out, plus the purchase costs that belong to the building (see which closing costs add to basis).

The IRS method in two steps

Publication 527 says the part of the cost you allocate to each asset is the ratio of that asset's fair market value to the fair market value of the whole property at the time you buy it. In plain terms: land share equals land value divided by total value, building share is the rest, and you multiply each by what you paid.

If you are not certain of the values, Publication 527 says you can divide the cost between them based on their assessed values for real estate tax purposes. That is the shortcut most small owners use, because the county's assessment shows a land line and an improvements line for free.

Use the property tax bill or assessment for the year of the purchase, and keep a copy with your closing papers.

A worked example

Example a made-up 16 unit building is bought for $1,200,000. The county assessment shows $180,000 for land and $420,000 for improvements, a total of $600,000. The land is 30% of the assessed total ($180,000 divided by $600,000) and the building is 70%. Applying that to the price, land is $360,000 and the building is $840,000. The sum is $1,200,000.

Example the same building. At the standard residential rate of 3.636% for a full year, the building share of $840,000 gives a deduction of about $30,542. The $360,000 of land is not depreciated.

What happens if the split is different

Example suppose an appraisal for the same made-up building says land is only 20% of the value. Land is then $240,000 and the building is $960,000. A full year at 3.636% is about $34,906, which is $4,363 more per year than the assessor split. The difference is real money, which is exactly why the split has to be one you can defend.

Do not choose a ratio because it gives a bigger deduction. The rule asks for fair market value, and the IRS's own shortcut is the assessment. A buyer who picks an unsupported number is the one who has to explain it later. If a lender appraisal, a purchase appraisal or a county assessment all point the same way, use that and keep the paper.

One more caution: assessed values are set for property tax purposes and sometimes lag the market. They give a ratio for the split, not the total value. You still apply the ratio to the price you actually paid.

What if the contract already splits the price?

Publication 527 includes an example where a single family rental was bought for $185,000 and the sales contract showed that the building cost $160,000 and the land cost $25,000, so the basis for depreciation was $160,000. A split written into the contract is useful evidence. Compare it to the assessment before you rely on it, and ask your preparer if the two disagree by a lot.

A short checklist for the day you buy

1. Get the latest property tax assessment and note the land line and the improvements line.
2. Compute the land percentage: land value divided by the total of the two lines.
3. Apply that percentage to the price you paid, not to the assessed total. Land gets its percentage, the building gets the rest.
4. Add the closing costs that belong to the building to the building side, and those that belong to the land to the land side. Costs of getting the loan are handled separately.
5. Save the assessment, the closing statement and your math in the property's folder. If the numbers are ever questioned, that file is your answer.

Do this once, in the first month you own the property. The depreciation schedule for the next 27.5 years flows from it.

Keeping the split going forward

Record the land and the building as two assets on the day you buy, and put each later improvement in its own account. When you replace a roof, add a kitchen or sell, the land never changes while the building does. Getting the split into the books once saves a hard conversation at sale time. The mechanics of the yearly deduction are in our 27.5 year guide.

How DoorKeeping handles it

In DoorKeeping each property has its own books, so land, building and each improvement can be separate accounts under that one property, and the assessment or appraisal can be saved with the property's documents. Depreciation expense maps to Schedule E line 18. DoorKeeping does not decide the split or give tax advice, so confirm the numbers with your tax preparer. The cost is $2 per unit per month with no other fees.

Sources

1. IRS, Publication 527, Residential Rental Property (2025): Separating cost of land and buildings; Land, read Oct 30, 2026
2. IRS, Publication 551, Basis of Assets: Land and Buildings, read Oct 30, 2026
3. IRS, Publication 946, How To Depreciate Property, read Oct 30, 2026

Questions

Can I use the property tax assessment to split land and building?

Yes, if you are not certain of the fair market values. Publication 527 allows you to divide the cost based on assessed values for real estate tax purposes.

Is the split fixed forever?

The split you make at purchase becomes your basis in each asset. Later improvements are added to the building or the land they belong to.

Does a smaller land share help me?

A smaller land share means a larger depreciable building and a bigger yearly deduction. It also has to be a value you can support, so use the assessment or an appraisal, not a guess.