Land Basis: How to Calculate and Adjust It for Taxes

To calculate land basis for taxes, start with what the land cost you when you acquired it (or the figure the tax code assigns based on how you got it), then track every capital improvement, assessment, easement payment, and casualty reimbursement that follows. The running total is your adjusted basis, and when you sell, you subtract it from the net sale price to find your taxable gain or deductible loss. Land can’t be depreciated, so basis is the only mechanism for recovering what you put in.¹

Your Starting Basis Depends on How You Got the Land

The opening number on your basis worksheet is set by the acquisition method. Get this piece wrong and every later adjustment sits on a bad foundation.

Land You Bought

If you purchased the land, your starting basis is the total cost. That means the purchase price plus the closing items that get capitalized: legal fees for preparing the deed, title insurance, survey costs, recording fees, transfer taxes, and any commission you paid a buyer’s agent.²

One trap: if you paid the seller’s delinquent property taxes as part of the deal, you can’t deduct them. They get added to your basis, because you were covering the seller’s obligation, not your own.³

Land You Received as a Gift

Gift property carries a dual basis rule, and there is no single figure to write down. Which basis applies depends on the price you eventually sell for.

If you sell for more than the donor’s adjusted basis, you use the donor’s basis (the “carryover basis”). If you sell for less than the land’s fair market value on the date of the gift, you use that lower fair market value. If the sale price lands between the two figures, you report zero gain and zero loss.²

If the donor paid gift tax on the transfer, part of that tax can bump up your basis. Multiply the gift tax paid by a fraction: numerator is the appreciation in the donor’s hands (fair market value minus donor’s adjusted basis), denominator is the total amount of the gift.⁴

Land You Inherited

Inherited land gets a stepped-up basis equal to the fair market value on the date of death, which wipes out any appreciation that accrued during the previous owner’s lifetime.⁵

The executor may instead choose an alternate valuation date six months after death, but only if that election reduces both the gross estate and the estate tax. Your basis has to match whatever value the estate used. When the estate files Form 706, the executor also files Form 8971 to report each heir’s basis, and you’re bound by that number when you sell.⁶

Land You Received in a Divorce

Transfers between spouses or incident to a divorce are treated as gifts for tax purposes. No gain or loss is recognized on the transfer itself, and the receiving spouse takes over the transferor’s adjusted basis.⁷

If your ex-spouse bought land for $50,000 that is worth $200,000 at the time of your settlement, your basis is still $50,000. The built-in $150,000 gain travels with the land and becomes your tax bill when you sell.

Land Acquired in a 1031 Exchange

A like-kind exchange defers the gain on investment or business real estate, but the deferral rides inside the basis of the replacement property. Your new basis equals the adjusted basis of the property you gave up, decreased by any cash received and increased by any gain you recognized on the exchange.⁸

Trade land with a $100,000 adjusted basis for replacement land worth $300,000, with no boot and no recognized gain, and your basis in the new land is $100,000. The $200,000 of deferred gain waits inside that low figure until you sell without doing another exchange.⁹

Splitting the Purchase Price Between Land and Buildings

When you buy improved property, the total cost has to be split between the land and the structures. The building depreciates over its recovery period (27.5 years for residential rental, 39 years for commercial), and the land does not.¹⁰ The IRS pays attention here, because inflating the building’s share pumps up your annual depreciation.

The default method is to split by relative fair market values at the time of purchase. If you don’t have those numbers, you can use the ratio from your local property tax assessment as long as it reflects market conditions.² A professional appraisal that values land and improvements separately is the strongest documentation.

Say you pay $500,000 for a rental property. The assessor puts the land at $80,000 and the building at $320,000, for $400,000 total. Land is 20% of the assessed value, so you allocate $100,000 of your $500,000 to land and $400,000 to the building.¹ The $400,000 goes on the depreciation schedule. The $100,000 sits untouched until sale.

Adjustments That Move Your Basis Up or Down

Your starting basis is a beginning, not an ending. Certain outlays increase it and certain events decrease it. The running total, your adjusted basis, is the figure you actually use at sale.¹¹

What Increases Basis

Capital improvements that add value to the land or adapt it to a new use go into basis. Common examples include installing utility lines, grading or reshaping terrain, drainage systems, paving, and building roads or sidewalks.² Routine repairs and maintenance don’t; those are current expenses.

Local assessments that tend to increase property value, such as charges for hooking up to public sewer or building a sidewalk along your frontage, must be capitalized rather than deducted as taxes. Any portion of an assessment attributable to maintenance or interest, though, is deductible.³

If you demolish a structure on the land, neither the demolition cost nor the remaining basis of the destroyed building is deductible. Both amounts get added to the basis of the underlying land.¹² Legal fees to defend or perfect title and costs to rezone are also basis additions.²

What Decreases Basis

Payments you receive for granting an easement reduce the basis of the affected portion of the land. If the payment exceeds that basis, the excess is a recognized gain.²

Insurance or other reimbursements for a casualty loss to the land also reduce basis, with any excess treated as gain (though you may be able to defer it by buying replacement property). Casualty losses on land go on Form 4684.¹³

Selling Only Part of a Tract

Own a large parcel and sell off a piece of it? You can’t apply an arbitrary chunk of your total cost to that sale. Federal regulations require you to equitably apportion the original basis among the parcels, and each sale is its own transaction.¹⁴

Splitting by acreage is often the cleanest method. Pay $200,000 for 20 acres, sell a 5-acre piece, and $50,000 of basis goes with the sale while $150,000 stays with the remaining 15 acres. When lots differ meaningfully in value (road frontage, water access, better soil), the allocation should reflect those differences. A professional appraisal at the time of subdivision is the clearest way to document an unequal split.

Turning Adjusted Basis Into a Tax Bill

Once you sell, the math is simple. Subtract adjusted basis from the amount realized (gross sale price minus selling expenses like broker commissions and closing attorney fees). The result is your taxable gain or deductible loss.¹⁵

Holding period drives the rate. Land held one year or less produces a short-term gain taxed at ordinary rates. Held more than a year, it produces a long-term gain taxed at 0%, 15%, or 20% depending on your taxable income.¹⁶

For 2026, single filers pay 0% on long-term gains up to $49,450 of taxable income, 15% between $49,450 and $545,500, and 20% above that. Married couples filing jointly hit 15% at $98,900 and 20% at $613,700.

Higher-income sellers also owe the 3.8% net investment income tax on gains once modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly).¹⁷ Stacked on top of the 20% capital gains rate, that reaches an effective federal rate of 23.8% before state tax.

One boundary worth naming: a loss on personal-use land is not deductible. Losses on investment or business land are deductible, but net capital losses can offset only up to $3,000 of ordinary income per year ($1,500 if married filing separately), with unused losses carried forward.¹⁶

1
Internal Revenue Service. Publication 527 (2025), Residential Rental Property
2
Internal Revenue Service. Publication 551 (12/2025), Basis of Assets
3
Office of the Law Revision Counsel. 26 USC 164 – Taxes
4
eCFR. 26 CFR 1.1015-5 – Increased Basis for Gift Tax Paid
5
Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent
6
Internal Revenue Service. Instructions for Form 706 (09/2025)
7
Office of the Law Revision Counsel. 26 USC 1041 – Transfers of Property Between Spouses or Incident to Divorce
8
Office of the Law Revision Counsel. 26 USC 1031 – Exchange of Real Property Held for Productive Use or Investment
9
Internal Revenue Service. Like-Kind Exchanges Under IRC Section 1031
10
Internal Revenue Service. Publication 946 (2025), How To Depreciate Property
11
Office of the Law Revision Counsel. 26 USC 1016 – Adjustments to Basis
12
Office of the Law Revision Counsel. 26 USC 280B – Demolition of Structures
13
Internal Revenue Service. Instructions for Form 4684 (2025)
14
eCFR. 26 CFR 1.61-6 – Gains Derived From Dealings in Property
15
Internal Revenue Service. Publication 523 (2025), Selling Your Home
16
Internal Revenue Service. Topic No. 409, Capital Gains and Losses
17
Office of the Law Revision Counsel. 26 USC 1411 – Imposition of Tax