According to the IRS Cost Segregation Audit Technique Guide, the most reliable and defendable method for accurately determining non-depreciable land value is by using the property tax ratio from official records, which distinguishes between land and improvement values. Since land cannot be depreciated, accurately identifying its share of the total purchase price is essential for compliance and maximizing your depreciation benefits.
The IRS discourages relying on arbitrary percentages (like a flat 10% or 20% allocation) as they may not reflect the property's actual proportions. Engineered Tax Services (ETS) utilizes the property tax card method because applying the tax card's ratio to your total purchase price yields a figure that is aligned with local assessments and viewed by the IRS as more defendable. Alternative options, if the tax card is skewed, include a professional appraisal or a competitive market analysis/comparables from a real estate agent.
Land Value Allocation: Key Facts & ETS Recommendation
- IRS Mandate: Land cannot be depreciated, making accurate allocation essential.
- IRS Standard: The IRS recommends using a “reasonable and consistently applied method” to allocate total cost basis between land and improvements.
- Discouraged Method: Relying on arbitrary percentages (e.g., flat 10% or 20%) is highly discouraged by the IRS.
- ETS Recommended Method (Most Reliable): The Property Tax Ratio method. ETS reviews official property tax records which often distinguish between land and improvement values, and applies that ratio to your total purchase price.
- Benefit of Recommended Method: It provides a solidly supported, defendable land value aligned with local assessments.
- Alternative Options (If Tax Card is Skewed): A professional appraisal or a competitive market analysis/comparables from a real estate agent.
