When investing in commercial or rental property, it’s important to understand how depreciation works, especially when it comes to land improvements. While land itself is not depreciable, enhancements made to the land can generate valuable tax deductions over time. Here’s how to identify, calculate, and maximize depreciation for land improvements.
Why Land Improvements Are Depreciable (But Land Is Not)
Land does not wear out or become obsolete, which is why the IRS does not allow it to be depreciated. However, land improvements – assets that enhance the usability, accessibility, or functionality of land – do deteriorate and require maintenance or replacement over time.
Because these improvements have a determinable useful life, they qualify for depreciation under the Modified Accelerated Cost Recovery System (MACRS). This allows property owners to recover the cost of these assets over their designated recovery periods through annual deductions.
Common Types of Land Improvements
Land improvements can vary depending on the type of property, but common examples include:
- Parking lots and driveways
- Sidewalks and curbs
- Landscaping and irrigation systems
- Fencing and security gates
- Retaining walls
- Lighting systems
- Drainage and stormwater management systems
Each of these assets has its own depreciable life, typically 15 years under MACRS, compared to 39 years for nonresidential building property.
Depreciation Methods for Land Improvements
Under the IRS’s MACRS guidelines, most land improvements are classified as 15-year property and use the 150% declining balance method, switching to straight-line depreciation when it maximizes deductions.
Here’s an example:
If a property owner spends $150,000 installing new parking lot paving, fencing, and exterior lighting, those costs would be depreciated over 15 years, with the greatest deductions occurring in the first several years.
This accelerated depreciation schedule helps property owners recover costs faster, improving cash flow and ROI.
Bonus Depreciation and Section 179 Considerations
Two major incentives can further accelerate depreciation for land improvements:
- Bonus Depreciation: Currently allows property owners to deduct a large percentage of qualifying assets in the year they are placed in service. As per the OBBBA passed in July 2025, 100% Bonus Depreciation has been reinstated for assets acquired or placed in-services after January 19th, 2025.
- Section 179 Expensing: Allows businesses to immediately expense qualifying property up to the annual limit, provided the improvements are used for business purposes and not acquired for rental residential property.
Many land improvements qualify under these provisions, making them ideal candidates for accelerated cost recovery through cost segregation.
Compliance Tips and Best Practices
To ensure accuracy and compliance with IRS rules:
- Segregate land improvements from building components using an engineering-based cost segregation study.
- Maintain detailed documentation for all improvement costs, including invoices, contracts, and dates placed in service.
- Review property classifications with your tax professional to confirm correct asset lives.
- Stay informed about current bonus depreciation percentages and Section 179 thresholds, as these can change with new legislation.
CSSI’s experienced engineers and tax specialists can help you identify and reclassify qualifying land improvements, ensuring you capture every available deduction while staying compliant.
Conclusion
Land may not depreciate, but land improvements can provide substantial tax savings when properly identified and depreciated. By leveraging MACRS rules, bonus depreciation, and Section 179 deductions, and working with experts like CSSI, property owners can accelerate cost recovery, improve cash flow, and strengthen overall investment returns.
CSSI has completed over 55,000 engineering-based cost segregation studies with zero IRS audits. Contact us today to learn how we can help you maximize your depreciation on land improvements and beyond. Contact us today!
