Land, Building, and Site Improvements

Where the lines get hard

Site preparation and general grading are generally treated as non-depreciable land. Grading and excavation tied to a specific building or improvement may follow that asset instead. The IRS audit guide notes that before-and-after photographs help support how land preparation costs are allocated.

Landscaping can be land or a land improvement. In IRS examiner matrices, landscaping that would be destroyed when a related depreciable asset is replaced is treated as a 15-year land improvement; landscaping that would not be is treated as land.

Those matrix rows are examiner guidance for the industries they cover, not a statute. The same plantings next to a building that would survive a parking-lot replacement are often left in land. The facts, not the plant species, drive the split.

Parking: lot vs. structure

A surface parking lot is a land improvement. A parking garage or stand-alone open-air parking structure is treated by the IRS as a building with a 39-year life, and its audit guide warns examiners about 15-year positions on such structures.

Striping, curbs, and landscape islands in a surface lot travel with the lot in those matrices. Ramps and decks that are part of a garage travel with the building. Attached residential parking can follow the residential rental building when the structure is part of that building.

Calling a garage a “land improvement” because it sits on land is the error the guide flags. Land improvements are improvements to land that are not buildings. A garage is a building.

Activity classes can override

Some industry activity classes include their own land improvements. Publication 946 gives the example of a paper manufacturer, whose land improvements fall under its activity class rather than class 00.3.

Rev. Rul. 2003-81 describes the order: check the asset-type classes used in all businesses first, then the activity class. When an item fits both, it goes in the asset category unless it is specifically excluded from that category or specifically included in the activity category.

Class 57.1 is another activity overlay. It covers billboards, service station buildings, and petroleum-marketing land improvements and produces 15-year recovery for those items. A gas-station canopy analysis also has to account for Rev. Rul. 2003-54, which treated the canopy as personal property and the footings as land improvements.

What stays with the building

Class 00.3 excludes buildings and structural components as defined in §1.48-1(e). Foundations, exterior walls, and building-mounted items that relate to the operation of the building stay in the 27.5- or 39-year class.

Site lighting, fencing, and dumpster pads are often land improvements on the facts. Building-mounted lighting that is the structure’s primary exterior light can stay with the building. The inspection notes should say what the fixture serves.

Documenting the land value

For acquisitions, the audit guide expects land to be valued first, at highest and best use, before improvements are estimated. Replacement-cost estimates of the improvements should approximate the price less that land value.

A written allocation in an applicable asset acquisition can bind the parties under §1060. Peco Foods is the cautionary case. If a purchase agreement will assign values to land and building, discuss it with your CPA before closing. The land number chosen at purchase is the number every later class in the study has to live with.