How do you split a rental purchase between land and building

Land is not depreciable, so the purchase price and qualifying acquisition costs must be allocated between land and depreciable improvements on a reasonable basis.

The tax treatment

Land is not depreciable, so the purchase price and qualifying acquisition costs must be allocated between land and depreciable improvements on a reasonable basis. This is a federal income tax starting point; the contract, ownership, accounting method, and actual use can change the result. State and local treatment should be checked separately.

The decision to make before filing

Compare the appraisal, assessor values, and transaction evidence rather than copying a generic percentage. The useful planning step is to resolve the classification while the underlying documents are still available, then reconcile it to the books and the prior-year return. If the transaction spans more than one year, track the opening balance and what happened to it afterward.

Illustrative example

An investor buys a house and lot for a single price. The land remains nondepreciable even though the entire purchase is financed. The owner compares a contemporary appraisal and assessor data, allocates acquisition costs consistently, and begins depreciation only on the building and eligible separate improvements.

Records that support the position

Retain the settlement statement, appraisal, assessor allocation, and a written basis calculation. Tie amounts on the return to bank activity and the agreement. When several assets, people, or uses are involved, write down the allocation method and apply it consistently. A short dated workpaper is easier to defend than a reconstructed explanation years later.

A common reporting error

Assigning all purchase price to the building overstates depreciation and creates future recapture exposure. Review both sides of the entry: a payment can affect income, basis, liability, or an expense at different times. A correct cash total alone does not establish the correct tax character.

Where to verify the rule

Start with IRS Publication 527: Residential Rental Property. Its examples and cross-references explain the underlying federal rule; check the current version and any later IRS guidance for the year at issue. For a coordinated review of related deductions and limitations, see Real estate tax planning.

How do you split a rental purchase between land and building?