Does Land Depreciate in Value?
In accounting, depreciation refers to the process of an asset losing value over time as it ages, deteriorates or becomes obsolete. Land, like any asset, can go down in value, but it doesn't depreciate in the accounting sense. This is important to businesses, because the depreciation of assets is tax-deductible as a business expense.
Most physical, or tangible assets -- such as buildings, vehicles, equipment and the like -- aren't going to last forever. A company's new delivery vehicle, for example, might have a usable life of 10 years, and its value declines over that time. Each year, the company can claim the decline in its value as an expense. That's depreciation. Under the most commonly used method of depreciation, which is straight-line depreciation, the company could claim a depreciation expense of 10 percent of the value of the vehicle every year for 10 years. Intangible assets, such as computer software or patents, might also be depreciable, because they, too, can become obsolete.
Land is a tangible asset, but it's not subject to depreciation for the simple reason that land doesn't get worn out or obsolete. In the words of the Internal Revenue Service, land doesn't have a "determinable usable life," which is a required element for any asset to be depreciable. That doesn't mean land can't decline in value. It certainly can. For example, a piece of undeveloped land in an area with a hot housing market would probably be in high demand, and that would be reflected in the value. If the housing market goes cold, the demand will drop, and so will the value of the land. But the decline doesn't qualify as depreciation.
Businesses can write off the decline in the value of land, but only when they sell the land. Say a business buys an acre of land for $10,000. Even if the business knows the land is declining in value, it can't claim it as a depreciation expense, because land isn't depreciable. However, if the company then sells the land for $8,000, it can claim the $2,000 as a capital loss for the year it sells the land.
Costs involved in preparing land for business use can be depreciated if they are so closely tied to other depreciable assets that you can determine a usable life for them. For example, if you were to construct a new building and plant bushes around the perimeter of the foundation, those bushes are essentially part of the building. You can't bulldoze the building without removing the bushes, so they have the same usable life as the building. The cost of the landscaping can be depreciated on the same schedule as the building itself. But land preparation expenses not directly associated with depreciable assets are not depreciable.