Taxation & Estate Planning

DEPRECIATION DEDUCTIONS FOR LAND

By Charles Rubin

Land (but not buildings and improvements on the land) is not subject to the allowance for depreciation. However, there is one method of obtaining depreciating deductions for land. A recent private letter ruling summarizes the method and the limitations on its use.

The method involves a purchase of a term of years interest in land. The IRS acknowledges that this converts the land to an intangible asset with limited use, thus qualifying it for depreciation deductions over the term of years (assuming that the land is used in a trade or business of the acquiring taxpayer or held for the production of income). Buildings purchased in this manner are not depreciated over the term of years, however ? as regular depreciable assets they are depreciated under normal (MACRS) depreciation rules and terms.

With depreciation deductions allowed for land in this manner, the planner will think to acquire land in joint fashion to create deductions ? that is, have a business entity that will be using the land acquire a term of years interest, and have the remainder interest purchased by a related person or entity. Thus, 100% of the land is acquired between the related entities, but the business entity will get depreciation deductions.

However, Congress has already closed the door on that technique, by providing that no depreciation deductions will be allowed to the term of years owner when the remainder interest is owned by a related person (within the related party rules of Sections 267(a) and (e)). If the acquiring taxpayers are able to plan around the related party rules of Sections 267(a) and (e), then this split purchase technique should be available.

Private Letter Ruling 200852013, 12/26/2008

Full post as published by Rubin on Tax on January 03, 2009 (boomark / email).