Allocating Costs for Land Vs. Building

When buying real estate, determine what you pay for land and buildings.


When you buy property that has buildings on it, you must indicate how much you paid for land and how much you paid for buildings. You need these figures for two reasons: to figure your depreciation and to calculate your profits when you sell the property. You can calculate these figures, either at the time you buy the property or when you file taxes indicating depreciation. You can also calculate profits on land and buildings when you sell the property by determining your cost basis for each.

Real Estate Tax Bills

Some states separate the value of your land and buildings on your tax bill. You can use this bill as the basis for your costs and expenses on the property. For example, if you paid $100,000 for a property, and the county assessor shows that the land is worth $30,000 and the building is worth $70,000, you can accept those figures if they seem reasonable to you.

Other Ways to Allocate

If you think the state or county assessor has valued your buildings disproportionately to your land, you can make your own calculations. However, those calculations must have a basis. You can hire an appraiser who will use comparable properties in the area near yours. Even if this valuation differs significantly from the state or county assessment, you can use it if you think it will stand up to Internal Revenue Service scrutiny.


You cannot depreciate land. You can depreciate buildings. This means you write off a portion of the value of your buildings each year until you have written off the full value of the buildings. For residential property, you write off the value of buildings over a 27.5-year period. Write off commercial buildings over a 39-year period. The more your buildings are worth as a percentage of the total property, the more you can depreciate for tax purposes. This is why it is important to get an accurate valuation of your buildings vs. land.


When you sell your property, you pay taxes on the profits. Figure profits by using this formula: sale price minus cost basis. However, any major improvement to you buildings you made while you owned it add to the cost basis. For example, if you put on a new roof, you would add the cost of that roof to your cost basis. A house you bought for $100,000 with a new roof that cost $10,000 has a cost basis of $110,000. If you sell that house for $150,000, you only pay taxes on $40,000 profit (150,000 minus 110,000). Your land, on the other hand, would retain its original cost basis in this scenario. However, if you pay for grading and adding drainage ditches, you could add these costs to the cost basis of the land. Minor repairs on buildings and landscaping for land do not add to the cost basis for buildings or land.

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