Rental Property Land Value Allocation | How to Split Cost Basis

Why This Split Matters

Land is never depreciable — only the building and other depreciable improvements are. If you depreciate the full purchase price without separating out land value, you are overstating your deduction, which the IRS can disallow on audit. Per IRS Publication 527, you must have a reasonable method for making this allocation, based on actual facts about your specific property — not a rule of thumb.

Method 1: The Property Tax Assessment Ratio

Most local property tax assessors separately state a land value and an improvement (building) value on your assessment notice, even though they tax the combined total. You can use the ratio between those two figures to allocate your purchase price:

This is the most commonly used method because the source document (your property tax assessment) already exists and is issued by an independent third party (the local assessor), which strengthens its credibility if questioned. Pull the actual current assessment for your specific parcel — do not use a county- or state-wide average.

Method 2: An Independent Qualified Appraisal

A licensed appraiser can separately value the land and the improvements as part of (or in addition to) a standard purchase appraisal. This tends to be the strongest evidence in an audit because it's an expert, property-specific valuation rather than a tax-assessment proxy — but it has an upfront cost and isn't always obtained for smaller residential purchases.

What Not to Do

• Do not apply a fixed percentage (e.g., "land is always 20%") without evidence specific to your property and location.
• Do not use a different state or county's typical ratio as a stand-in for your own property's assessment.
• Do not ignore the allocation and depreciate 100% of the purchase price — this overstates depreciation and understates land basis for eventual sale.