One important lesson that every investor learns sooner or later is that land is not a depreciable asset. You may hear it from your tax preparer, a real estate broker, another investor or others. I’m hoping that no one found this out in an audit.
What many might not be aware of though, is that land improvements are deductible. There are many improvements that we make to land. Some of which you might not think of generally as improvements.
Why take the time to make this distinction?
I think many investors leave some depreciation on the table. It is a common practice among tax preparers to use the assessor’s break out of improvements and land as the ratio when determining what is depreciable. I’m going to tell you this might be a starting point but it is a sure fire way to lose potential deductions without at least some adjustments for land improvements.
When you think about it, it’s quite clear that improved land has much more value than raw land. Many improvements would require a cost segregation study, but some improvements can more easily be broken out.
What are these land improvements?
There are actually many things we do to improve the land. Some improvements are simply to increase curb appeal or the attractiveness of the land. For example — think landscaping, shrubs, pools, walkways, patios, etc. Some improvements may be made to improve security such as outdoor lighting and fencing. Some improvements may be more for preventing erosion such as drainage systems, retaining walls or special plantings.
My purpose here is to get your mental juices flowing. An income property is more than a house on a piece of land. An investor looking to increase their cash flow and perhaps reduce their taxes would be wise to look beyond the obvious. Some of the land improvements can be broken out simply and justifiably. To really take advantage of all your potential depreciation it is wise to look into cost segregation. Many may realize how a cost segregation study might help with depreciating some of the components of a building faster, but it is my belief and experience that many investors fail to consider that land is more than dirt.
BawldGuy Here: For awhile now I’ve been outlining a post I hope to publish next week about using multiple strategies synergistically, including cost segregation. It’s relatively involved, so it’s takin’ awhile.
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[...] I talked about land improvements which are depreciable though land clearly is not. I gave you a taste of what can be carved out as a 15 year land [...]