Land vs. Improvement Value: What to Enter

How to find the right land allocation for cost segregation. County appraisal district guidance, closing-disclosure tips, and IRS scrutiny zones.

Land vs. Improvement Value: What to Enter

What you'll learn. Why the land/building split matters for depreciation, where to find a defensible number, and the line the IRS watches for aggressive splits.

Why the split exists at all

Depreciation under IRC §167 and §168 applies to property that wears out, decays, or has a determinable useful life. Land doesn't. A 1937 lot is just as much a lot today as it was in 1937. So the depreciable basis of any real-estate purchase is the building (and improvements) only — not the dirt.

Every depreciation calculation, including cost segregation, starts with the same basic split:

Depreciable basis = Purchase price + capitalized settlement costs − Land value

Get the land number wrong and every downstream number is wrong. Set land too high, the property owner under-depreciates and leaves money in the IRS's pocket. Set it too low, the IRS may challenge the allocation on audit and reverse the over-depreciation with penalties.

The four sources of a defensible land number

Listed in order of how much weight a CPA or auditor typically gives each one.

1. Closing disclosure or settlement statement

If the property owner negotiated an explicit land/building allocation at closing — for example, on a contract addendum or HUD-1/Closing Disclosure schedule — that number is the strongest support. It's contemporaneous with the transaction, signed by both parties, and reflects the actual deal.

2. County appraisal district allocation

Texas counties (Harris, Dallas, Travis, Montgomery, Tarrant, and others) publish a land value and improvement value separately on every parcel. The appraisal-district ratio is the most common method:

Land allocation = (county land value ÷ county total appraised value) × purchase price

Example: a property with a county-appraised land value of $80,000 and total appraised value of $400,000 — that's a 20% land ratio. On a $500,000 purchase, the land allocation is $100,000 and depreciable basis is $400,000.

This is what the calculator does automatically when the property owner uses the address lookup in Step 2. The appraisal district's ratio is publicly defensible — the county is an arm's-length third party with no incentive to inflate or deflate either side.

3. Real-estate appraisal at acquisition

If the property owner commissioned an appraisal at acquisition (common on commercial deals), the appraiser typically provides a separate land value. This is contemporaneous and from a licensed third party — strong support.

4. Property tax assessor ratio in a different year

Some property owners use a recent tax-assessor ratio rather than the year of purchase. This is acceptable when the year-of-acquisition data is unavailable, but the IRS Cost Segregation Audit Techniques Guide notes that the closer the assessment year is to the acquisition year, the better.

The IRS scrutiny zone

The IRS watches for unusually low land allocations — typically below 15–20% of total basis on a suburban lot, or below 10% on an urban infill lot. Aggressive splits show up on audit and the burden is on the property owner to support the allocation.

Three patterns that draw scrutiny:

• Land allocations below the appraisal-district ratio without independent appraisal support.
• Round numbers — a "land = $50,000" with no calculation behind it on a $500,000 purchase.
• Internal inconsistency — a 10% land allocation for federal income tax purposes, while protesting the county appraisal at a 25% land ratio.

The simplest defensible approach: use the county appraisal district ratio applied to the actual purchase price. It's reproducible, contemporaneous, and from a third party.

What to enter in the calculator

The calculator accepts either:

• Land value (preferred). Enter the dollar value of the land alone. The engine computes depreciable basis as purchase price minus land.
• Improvement value. If the property owner has the appraisal-district improvement number but not the land number, enter that. The engine treats improvement value as the depreciable basis directly and backs into land as the residual.

For Texas counties supported by the address lookup (Montgomery, Harris, Dallas, Travis), both numbers come pre-filled from the appraisal district. Both are overridable.

Try the calculator with a 25% land allocation →

Settlement costs add to basis

Title fees, transfer taxes, recording charges, and certain inspection fees capitalize into basis under Treas. Reg. §1.263(a)-2 and §1.263(a)-4. The calculator has a separate settlement-costs field on Step 2 that adds to depreciable basis after the land/building split.

What does not capitalize: prepaid taxes, prepaid insurance, mortgage points (those have their own amortization rules), and HOA initiation fees that are not part of the property purchase.

What this tutorial doesn't decide

The split between land and building is one of the most fact-specific questions in real-estate tax. Edge cases (waterfront lots with eroding shorelines, leasehold improvements, ground-lease structures, properties where land value exceeds total purchase price) all warrant CPA review. The screening calculator is a starting point, not a substitute.

Sources

• IRC §167 — Depreciation (limit on depreciable property)
• IRC §168 — Accelerated cost recovery system
• Treas. Reg. §1.167(a)-5 — Land allocation rule (depreciation excludes land)
• Treas. Reg. §1.263(a)-2 and §1.263(a)-4 — Capitalization of acquisition costs
• IRS Cost Segregation Audit Techniques Guide — land allocation methods

Disclaimer. This tutorial describes general federal tax concepts. TaxProtestTx (Nought Labs LLC) is a feasibility-screening tool, not tax advice or a cost segregation study. Calculator output cannot be relied on under Treasury Circular 230. Consult a qualified CPA, EA, or attorney before filing. Results are not guaranteed.