Real Estate Tax Calc
Why the split matters
Land isn't depreciable, so a higher building allocation means a larger annual deduction. The IRS expects a reasonable, defensible allocation — not one gamed purely to maximize deductions.
Common methods
Assessor ratio: use the county's land-to-building ratio from your property tax bill. Appraisal: a professional appraisal separating land and improvements. Insurance/replacement cost: sometimes used as supporting evidence.
Keep documentation
Whatever method you use, keep the records. If the split is challenged, you'll want the assessor statement or appraisal that supports it.
How much the allocation is really worth
The split is not a rounding decision — over the life of a rental it can move tens of thousands of dollars of deductions. Take a $400,000 residential rental. If you allocate 20% to land, the building basis is $320,000 and annual depreciation is about $11,636. If instead you allocate 35% to land, the building basis drops to $260,000 and annual depreciation falls to about $9,455 — roughly $2,180 less every year for 27.5 years. At a 24% marginal rate, that single percentage choice is worth over $14,000 in lifetime tax deductions.
This is exactly why the IRS pays attention to the allocation and why you cannot simply assign the smallest possible number to land. The allocation must be reasonable and supportable, tied to relative fair market values, not reverse-engineered to maximize the deduction.
Walking through the assessor-ratio method
The most common, best-documented method uses your county property tax assessment. The assessor already splits your parcel into a land value and an improvement (building) value for tax purposes. You apply that ratio — not the raw assessed dollars — to your actual purchase price. Example: the assessment shows land $50,000 and improvements $150,000, a total of $200,000, so land is 25% of value. On a $400,000 purchase, you allocate $100,000 to land and $300,000 to the building.
Using the ratio rather than the assessed dollars matters because assessed values often lag market prices. If the assessment totals $200,000 but you paid $400,000, applying the 25% land ratio scales correctly to what you actually paid. Keep a copy of the assessment notice or the county's online record showing the land and improvement breakdown for the year you bought.
When an appraisal beats the assessor ratio
The assessor ratio is convenient, but it is not always the most favorable — or the most accurate. In some jurisdictions land is assessed aggressively, producing a high land ratio that shrinks your deduction. A qualified appraisal that separately values the land and the improvements can support a different, well-documented split. Appraisals are especially worth it for higher-value or unusual properties, where a few percentage points of allocation translate into large dollars.
Other supporting evidence includes a purchase-contract allocation negotiated with the seller (both parties generally must report consistently), replacement-cost or insurance figures for the structure, and comparable vacant-land sales in the area. Any of these can corroborate a land value; using two independent sources that roughly agree is the strongest position.
Special situations: condos, new construction, and demolition
A condominium owner still has an underlying land interest, but it is usually a small fraction of value; the assessor ratio typically handles this correctly. For new construction, allocate the lot's purchase price to land and the construction costs to the building — the paper trail is unusually clean. If you buy a property intending to demolish the existing structure, the tax rules flip: the cost of the building and the demolition are generally added to the land basis and are not depreciable, because you never placed that structure in service as a rental.
Can you change the allocation later?
Once you set an allocation and begin depreciating, that is your method — you cannot casually re-split it each year to chase a bigger deduction. A genuine correction of an erroneous allocation is generally an accounting-method change made on Form 3115, not a silent adjustment on this year's return. The practical lesson is to get the split right at the start: document it the year you place the property in service, keep the assessment or appraisal in your permanent file, and be consistent every year after.
The IRS does not accept a token land value
A tempting shortcut is to assign land an artificially tiny value — say 5% — to maximize the depreciable building. The IRS and the courts have repeatedly rejected allocations that ignore economic reality. In the well-known case involving improperly low land allocations, the Tax Court reallocated far more value to land where the taxpayer could not support the split. The safe posture is an allocation that a neutral appraiser would call reasonable. If your building-heavy split is genuine — for example an older structure on a modest lot in a low-land-cost area — document why, because in some markets land truly is a small fraction and a high building allocation is perfectly defensible. The rule is not 'minimize land'; it is 'be accurate and be able to prove it.'
Land ratios vary enormously by market
There is no national default. In dense, high-cost coastal cities, land frequently represents 40%–60%+ of a property's value, because the dirt is scarce and expensive. In many inland and rural markets, land may be only 10%–20%, with most of the value in the structure. This is why a friend's '20% land' rule from another state is useless for your property — the correct number is a fact about your parcel in your market, established by your assessor's ratio or an appraisal, not a rule of thumb. Two identical buildings can carry very different depreciation simply because one sits on far more valuable land.
Improvements change the mix over time
Your original land-versus-building split is not the end of the story. Every capital improvement you make — a renovation, an addition, a new roof — adds to the building side of the ledger as a separate depreciable asset, while the land basis stays fixed. Over years of improvements, a larger and larger share of your total basis becomes depreciable. You do not re-split the original purchase; you simply layer each new improvement onto its own schedule. Land, by contrast, is never depreciated and never re-valued for depreciation purposes while you own it, no matter how much the market moves.
Land allocation and the sale down the road
The split you choose has a second life at sale. Because land is not depreciated, it generates no depreciation recapture — only the building portion does. A higher building allocation gives you bigger deductions each year but also more unrecaptured Section 1250 gain (taxed up to 25%) when you sell, since more depreciation has reduced your basis. This is not a reason to under-allocate the building; the annual deduction is worth more than the deferred, capped recapture for most investors. But it does mean your allocation decision echoes for the entire holding period and into the exit, which is one more reason to set it carefully and document it well.
Practical steps to set and defend your allocation
First, pull the assessor's land and improvement values for the year you bought and compute the land percentage. Second, apply that percentage to your actual total basis (purchase price plus capitalized closing costs). Third, if the assessor's land figure looks unreasonable for your market, obtain an appraisal or gather comparable land sales and contract-allocation evidence to support a better number. Fourth, record the chosen split and the supporting document in your permanent property file. Fifth, use the same allocation consistently every year and carry it into your depreciation schedule. Following these steps turns a subjective judgment into a documented, defensible position.
Frequently asked questions
What's the easiest way to split land and building value?
The county assessor's land-to-building ratio is the most common, well-documented method. Apply the assessor's land percentage to your actual purchase price.
Can I choose any split I want?
It must be reasonable and defensible. An assessor ratio or appraisal supports your allocation.
Should I use the assessed dollar amounts or the ratio?
Use the ratio. Assessed values often lag the market, so applying the assessor's land percentage to your actual purchase price scales the allocation correctly to what you paid.
What if the assessor's land value seems too high?
You are not bound to it. A qualified appraisal that separately values land and improvements, a contract allocation, or comparable land sales can support a more accurate — often more favorable — split, as long as it is documented.
Is land value for a condo different?
A condo includes a small underlying land interest, usually a minor fraction of value. The assessor ratio typically captures it correctly, so the same method applies.
Can I change my land/building split after I start depreciating?
Not freely. Correcting an erroneous allocation is generally an accounting-method change filed on Form 3115, not an informal year-to-year adjustment. Set it correctly at the outset and stay consistent.
Is there a standard land percentage the IRS expects?
No. There is no national default, and a token 'land is 5%' figure will not survive scrutiny. Land can be 40%–60% of value in dense coastal markets and 10%–20% in many inland areas. The correct number is a fact about your specific parcel, supported by your assessor's ratio or an appraisal.
Does a high building allocation increase my taxes at sale?
Indirectly, yes. Only the building generates depreciation, so a higher building allocation means more depreciation over time — and more unrecaptured Section 1250 gain (taxed up to 25%) when you sell. For most investors the larger annual deduction still outweighs the deferred, capped recapture, but it is worth understanding the trade-off.
What if I buy a property to tear the building down?
Then the rules flip. If you acquire a property intending to demolish the existing structure, the cost allocated to that building plus the demolition costs are generally added to the land basis and are not depreciable, because the structure is never placed in service as a rental. Only a building you actually put into service can be depreciated.
Sources
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.