You cannot write off a land purchase for business in the year you buy it. The IRS treats land as a capital asset with an indefinite useful life, so its cost is capitalized into basis and recovered only when you sell.1Internal Revenue Service. Publication 946 – How To Depreciate Property The meaningful tax benefits sit elsewhere: depreciable improvements you build on the land, ongoing carrying costs like property tax and interest, and the treatment of gain when you eventually sell.
Why the Purchase Price Is Not Deductible
Depreciation exists because assets wear out. Buildings deteriorate, equipment breaks, vehicles rack up miles. Land does none of that. Because its useful life is indefinite, IRS Publication 946 lists land as property that cannot be depreciated.1Internal Revenue Service. Publication 946 – How To Depreciate Property No annual deduction. No accelerated write-off. No Section 179 election.
The purchase price is capitalized instead. It sits on your books as a long-term investment and stays there until disposition, at which point you subtract basis from the sale price to determine taxable gain or loss. Business real property sales are generally reported on Form 4797.2Internal Revenue Service. Instructions for Form 4797
So if you pay $500,000 for a vacant parcel, that $500,000 is locked in basis until you sell. The tax planning starts with what you add to that basis, and what you build on top of it.
Costs That Get Added to the Land’s Basis
The purchase price is only the starting point. A range of transaction and site-preparation costs must also be capitalized. None of them are deductible in the year paid, but each dollar added to basis reduces taxable gain at sale.
- Transaction fees: attorney fees for the purchase agreement, title insurance, real estate broker commissions, recording fees, and transfer taxes.
- Site preparation: land surveys, clearing, grading, leveling, and debris removal to make the property usable.
The Demolition Trap
If you buy a property and tear down an existing structure, every dollar spent on the demolition is added to the land’s basis. Any remaining undepreciated value of the demolished building goes into land basis too. None of it is deductible.3Office of the Law Revision Counsel. 26 US Code 280B – Demolition of Structures Before 1984 this rule applied only to certified historic structures; Congress broadened it to cover every demolition, regardless of building type or your original intent. If you planned to renovate but later demolished, the costs still capitalize into the land.
Depreciable Improvements: Where the Real Deductions Are
Land itself is permanently non-depreciable. Things you build on or attach to the land generally are. Parking lots, fences, sidewalks, drainage systems, retaining walls, exterior lighting, and access roads have finite useful lives. The IRS classifies these land improvements as 15-year property under the Modified Accelerated Cost Recovery System.1Internal Revenue Service. Publication 946 – How To Depreciate Property
Compare that to the building itself, which depreciates over 39 years for commercial property or 27.5 years for residential rental. A parking lot depreciates more than twice as fast as the building above it.
Cost Segregation Studies
When you buy an improved property, the purchase price covers everything at once: land, building, and every component in between. A cost segregation study is an engineering analysis that breaks that lump sum into its individual pieces. The goal is to shift as much value as defensibly possible out of the 39-year building category and into shorter-lived categories: 15-year land improvements, 7-year personal property, sometimes 5-year assets. It’s a technical exercise, and the IRS expects the allocation to be supported by an engineering report if audited.
100% Bonus Depreciation
The biggest accelerator right now is bonus depreciation. Under the One Big Beautiful Bill Act, Congress permanently reinstated the 100% additional first-year depreciation deduction for qualified property acquired after January 19, 2025.4Internal Revenue Service. Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction Amended as Part of the One Big Beautiful Bill Place a qualifying 15-year land improvement in service in 2026 and you can deduct the entire cost in year one instead of spreading it over 15 years.
That’s a sharp reversal from the recent phasedown, when bonus depreciation had dropped to 60% for 2024 and 40% for 2025. The permanent reinstatement makes a cost segregation study substantially more valuable than it was even months earlier.
Section 179 Does Not Cover Land Improvements
A common misconception worth addressing: Section 179 expensing does not apply to land or land improvements. Publication 946 explicitly excludes them.1Internal Revenue Service. Publication 946 – How To Depreciate Property Fences, paved parking areas, docks, bridges, and similar assets are all outside Section 179. Deductions for those flow through bonus depreciation instead, which at 100% is actually more generous because it has no dollar cap. Annual depreciation deductions are reported on Form 4562.5Internal Revenue Service. About Form 4562, Depreciation and Amortization
Carrying Costs You Can Deduct Each Year
Even though the purchase price stays locked up, several ongoing costs of holding business land are deductible in the year you pay them.
Property taxes paid on land used in your trade or business are deductible as an ordinary business expense. The individual SALT cap does not apply here; those taxes come off your business return, not as a personal itemized deduction.
Interest on a loan used to acquire business land is generally deductible as a business expense, subject to the Section 163(j) business interest limitation, which caps the deduction at business interest income plus 30% of adjusted taxable income for businesses over the gross receipts threshold.6Office of the Law Revision Counsel. 26 US Code 163 – Interest Small businesses under the threshold deduct interest without this cap. If you hold land purely as an investment rather than for active business use, the interest deduction is limited to your net investment income for the year.
Electing to Capitalize Under Section 266
Current-year deductions don’t always help. If you already have losses or low taxable income, you can elect under Section 266 to capitalize those carrying charges into the land’s basis instead of deducting them.7Office of the Law Revision Counsel. 26 USC 266 – Carrying Charges Higher basis, lower gain at sale. The election is annual, and you can pick and choose which costs to capitalize. Make it by attaching a statement to your tax return identifying the property and citing Section 266.
When Land Is Inventory Instead
Everything above assumes you’re buying land to use in your business or hold for investment. Real estate developers and builders who buy land to subdivide and sell to customers operate under different rules. For them, land is inventory, not a capital asset.
When land is inventory, all acquisition and development costs get capitalized into cost of goods sold under the Uniform Capitalization Rules of Section 263A.8Office of the Law Revision Counsel. 26 US Code 263A – Capitalization and Inclusion in Inventory Costs of Certain Expenses That includes purchase price, loan interest, direct development costs, and a share of indirect overhead. Nothing is deducted until the specific lot or finished property is sold, at which point the capitalized cost offsets sale revenue to determine gross profit.
The dealer-versus-investor line matters. The IRS looks at the full picture: holding period, purpose at acquisition, number of properties bought and sold, whether you made significant improvements like subdividing or adding infrastructure, and whether real estate sales are your regular business activity. A dealer pays ordinary income tax on every sale and cannot use a 1031 exchange to defer gains. An investor qualifies for long-term capital gains rates and can defer through like-kind exchanges. If you’re regularly buying and flipping land, assume the IRS will treat you as a dealer.
What Happens When You Sell
The sale is where you finally recover the land’s basis. Business real property held more than a year qualifies as Section 1231 property. If your net Section 1231 result for the year is a gain, it’s treated as long-term capital gain, taxed at 0%, 15%, or 20% depending on income. If it’s a net loss, it’s treated as an ordinary loss, which offsets ordinary income.9Office of the Law Revision Counsel. 26 USC 1231 – Property Used in the Trade or Business and Involuntary Conversions A five-year lookback recharacterizes current-year gain as ordinary income to the extent of net Section 1231 losses claimed in the prior five years.
Land itself has no depreciation to recapture, so pure land gains fall under the regular capital gains rates. Depreciation claimed on improvements or buildings is a separate matter: gain attributable to prior depreciation on real property is taxed at a maximum rate of 25% under the unrecaptured Section 1250 gain rules.10Office of the Law Revision Counsel. 26 US Code 1250 – Gain From Dispositions of Certain Depreciable Realty
If you’re selling business or investment land and buying similar real property, a like-kind exchange under Section 1031 defers the entire gain, with the old basis carrying over to the new property reduced by any cash received.11Office of the Law Revision Counsel. 26 USC 1031 – Exchange of Real Property Held for Productive Use or Investment You have 45 days from the sale to identify replacement property and 180 days to close. Land held as dealer inventory does not qualify.