Land vs. Building Allocation: How to Split an Apartment Purchase Price for Depreciation
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When a syndication buys an apartment building, it must split the price between land, which is never depreciated, and the building (plus land improvements and personal property), which is. The IRS says to allocate by the fair market value of each part at the time of purchase, and if you are not certain of those values, you can use the ratio of the land and building values on the property tax assessment. A supportable appraisal or a cost segregation study can justify a different split. Because residential rental buildings are depreciated over 27.5 years, every point of land allocation changes the deal's deductions for decades.
This guide shows the methods, the math and the records to keep. For how depreciation reaches investors, see apartment syndication taxes for beginners.
What gets allocated?
Start with the total depreciable basis: the purchase price plus acquisition costs that must be capitalized, such as title insurance, legal fees for the purchase and transfer taxes. Your CPA decides which closing costs are capitalized. Loan costs are generally amortized over the loan term instead, and some syndication costs are not deductible at all (see syndication costs under Section 709).
That total is then split between:
- Land: not depreciable.
- Building and structural components: 27.5 years for residential rental property.
- Land improvements (parking lots, sidewalks, fencing, landscaping): generally 15 years.
- Personal property (appliances, some flooring and fixtures): generally 5 or 7 years.
Without a cost segregation study, most small deals put everything other than land into the building line.
What methods does the IRS accept?
IRS Publication 527 says the part of the cost you allocate to each asset is the ratio of that asset's fair market value to the value of the whole property when you buy it. If you are not certain of the fair market values, you can divide the cost based on their assessed values for real estate tax purposes.
| Method | How it works | Watch out for |
|---|---|---|
| Tax assessment ratio | Land assessed value / total assessed value, applied to your basis | Ratios can be stale or set by formula; some counties do not split land and building |
| Appraisal | The lender's or your own appraiser values land separately | Ask the appraiser to state the land value and method in the report |
| Cost segregation study | An engineer splits basis into land, building, land improvements and personal property | Costs money; usually worth it for larger deals |
| Contract allocation | Buyer and seller agree to a split in the purchase contract | Must be arm's length and supported; the IRS is not bound by it |
A worked example (made up)
The numbers below are invented to show the math.
- Purchase price: $5,000,000. Capitalized acquisition costs: $100,000. Basis to split: $5,100,000.
- The county assessment shows land at $600,000 and improvements at $2,400,000, so land is 20% of assessed value.
| Land share | Land | Building | Yearly depreciation (27.5 years) |
|---|---|---|---|
| 20% (assessor) | $1,020,000 | $4,080,000 | $148,364 |
| 30% | $1,530,000 | $3,570,000 | $129,818 |
| 12% (appraisal) | $612,000 | $4,488,000 | $163,200 |
Moving from a 30% to a 12% land share adds about $33,000 a year of depreciation in this example, before any cost segregation. The first year is smaller under the mid-month convention, which counts only the months the building was in service.
How do you choose?
- Get the assessor's split for the parcel and note the assessment date.
- Check it against the market. Look at recent land sales nearby and ask whether the assessor's land value is close. In dense urban areas land can be a large share; in suburban garden-style properties it is often smaller.
- Use the appraisal. If the lender's appraisal states a land value, compare it. A big gap between the assessor and the appraiser is a reason to ask your CPA which is better supported.
- Consider cost segregation. For larger deals, a study gives a supported land value and moves part of the basis into shorter lives. See cost segregation for apartment syndications.
- Document it in the tax file: the method, the source documents and the date.
Why it matters to investors
A larger building share means more depreciation on the K-1 each year, which can shelter more of the cash distributions (see are distributions taxable?). It also lowers basis faster, so more of the gain at sale can come back as depreciation recapture. The allocation should be accurate and supported, not aggressive. An unsupported land share can be adjusted in an audit, and under the partnership audit rules the deal company can owe the tax (see partnership representative and IRS audits).
How DoorRaise fits in
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FAQ
Can I just use 20% for land?
There is no IRS rule that sets a fixed land percentage. Use the assessment ratio, an appraisal or a study for the actual property, and keep the support.
Is the land allocation the same for property taxes and income taxes?
No. The assessor's values are a starting point for income tax, not a requirement. You can use a better-supported fair market value split.
Can we change the allocation in a later year?
Changing how basis was allocated usually means amending returns or filing for a change in accounting method. Ask your CPA before the first return is filed, because getting it right at the start is much simpler.
Does the allocation affect what the deal pays at sale?
It affects the gain and its character. More depreciation taken means lower basis, so a larger taxable gain and more of it taxed as recapture.
Next step: see how depreciation shows up on investors' K-1s in the K-1 in a real estate syndication.
Sources
- IRS Publication 527, Residential Rental Property
- IRS Publication 946, How To Depreciate Property
- IRS Publication 5653: Cost Segregation Audit Techniques Guide
This article is general information, not tax or legal advice. The example is made up to show the math. Talk to a CPA about your deal. DoorRaise is not a law firm, broker-dealer, investment adviser or funding portal.