Land Allocation and Bonus Depreciation for Net Lease Buyers
Land allocation sets the boundary between nondepreciable land and the basis available for building depreciation, cost segregation, and any potential bonus depreciation. It belongs in the underwriting file before a deduction estimate is treated as meaningful.
Land allocation and bonus depreciation are connected, but they are not the same analysis. The land portion of a net lease purchase is not depreciable. Only after the buyer’s basis is separated between land and depreciable property can qualified advisers evaluate building components, land improvements, equipment, and other assets under the applicable recovery-period and bonus-depreciation rules.
A percentage borrowed from another transaction can distort the result. Two properties with the same purchase price may have different underlying land values because of parcel size, location, entitlement, site coverage, access, traffic, improvements, and local market conditions. A high-value corner in a major metro does not necessarily support the same allocation as a similar tenant on a smaller parcel in a secondary market.
Why land allocation comes before bonus depreciation
IRS Publication 946 explains that land cannot be depreciated because it does not wear out, become obsolete, or get used up. It also explains that buildings and certain qualifying land improvements may be depreciable when the other requirements are satisfied.
IRS Publication 551 addresses a combined purchase of land and buildings. When both are acquired for a lump sum, the buyer allocates basis among them so depreciation can be calculated for the building. Publication 551 describes an allocation based on each asset’s fair market value relative to the fair market value of the whole property and notes assessed values as a possible basis when fair market values are uncertain.
That first division affects every later schedule. Amount assigned to land is outside the depreciable pool. Amount assigned to the building and other depreciable assets may then require additional classification. A cost segregation analysis does not turn land into depreciable property or create basis that the buyer did not acquire.
Total tax basis
Reconcile purchase consideration and properly capitalized acquisition costs with the closing and accounting records.
Land versus improvements
Support the relative fair values of the land and the acquired improvements using transaction-specific evidence.
Asset classification
Ask qualified advisers to classify the depreciable pool and test eligibility, timing, elections, limitations, and exit consequences.
A simplified allocation framework
Assume a buyer and its advisers determine that the transaction’s tax basis is $4,000,000 after reviewing the consideration and capitalized acquisition costs. A supported valuation analysis allocates 25% to land and 75% to improvements. The illustration would begin with $1,000,000 of nondepreciable land basis and $3,000,000 of basis in acquired improvements.
The $3,000,000 is not automatically a bonus-depreciation deduction. The ordinary structural building portion generally remains 39-year nonresidential real property. A qualified analysis may identify some landlord-owned components as shorter-life property, but eligibility still depends on the actual assets, ownership, basis, acquisition rules, placed-in-service timing, elections, business use, and taxpayer-level limitations.
Illustration only—not a tax calculation
- Total illustrative tax basis: $4,000,000.
- Illustrative land allocation at 25%: $1,000,000, not depreciable.
- Illustrative basis remaining for acquired improvements: $3,000,000.
- Potential shorter-life basis: not assumed; it must be established through asset-level facts and qualified analysis.
- Potential current deduction: not calculated; eligibility and usability are taxpayer-specific.
Evidence that can support a land allocation review
No single document necessarily answers every allocation question. A useful file reconciles multiple sources and explains material differences. The buyer’s appraiser, accountant, attorney, and cost-segregation professional should determine which evidence is appropriate for the transaction and how it should be weighted.
Assessed values can be useful evidence, but they should not be treated automatically as market value. Likewise, a broker opinion, lender appraisal, insurance value, replacement-cost estimate, or online land-value estimate may have been prepared for a different purpose. The adviser should understand what each source measures before using it in a tax-basis allocation.
Net lease facts that can change the analysis
Large or strategically located parcels
A convenience store, QSR, car wash, or freestanding retail property may occupy a valuable corner or include excess land, access rights, easements, or future redevelopment potential. The tenant’s rent and credit do not make the land depreciable, and the lease value should not be used as a shortcut for land value.
Tenant-owned property
Visible improvements are not necessarily part of the buyer’s depreciable basis. Fuel equipment, restaurant equipment, signage, wash systems, furniture, or trade fixtures may belong to the tenant, franchisor, fuel supplier, or lender. Review the purchase agreement, lease, exhibits, bills of sale, UCC materials, and surrender provisions before including any asset in the buyer’s model.
Going-concern or intangible value
Some transactions include more than land and improvements. If a buyer acquires a trade or business or separate intangible rights, additional allocation and reporting rules may apply. A pure leased-fee real estate purchase can present different facts from an owner-operated business acquisition. Qualified tax and legal advisers should identify exactly what the contract conveys.
How land allocation connects to current bonus-depreciation law
IRS guidance issued with Notice 2026-11 explains the permanent 100% additional first-year depreciation deduction for certain eligible depreciable property acquired after January 19, 2025. The guidance addresses eligible depreciable property; it does not change the rule that land is not depreciable.
After land is separated, the remaining analysis still has several gates. The buyer must own the asset and have depreciable basis in it. The asset must fall within an eligible category, satisfy the acquisition rules, and be placed in service. The investor’s qualified professional must also consider elections, state conformity, passive-activity and at-risk limitations, entity-level rules, and the effect of accelerated depreciation on adjusted basis and possible recapture.
For the broader framework, review Stonecliff’s net lease bonus depreciation guide, used-property acquisition guide, and placed-in-service timing guide.
Five allocation mistakes to avoid
- Copying a percentage from another deal. The land-to-improvement relationship is property- and date-specific.
- Using the tax assessment without understanding it. Assessment practices, ratios, valuation dates, and classifications vary.
- Counting property the buyer did not acquire. Tenant or third-party assets cannot simply be included because they sit on the site.
- Treating all non-land basis as bonus eligible. The structural building generally remains longer-life property, and each shorter-life classification requires support.
- Ignoring consistency. The appraisal, purchase agreement, closing statement, fixed-asset schedule, cost-segregation study, tax filings, and later disposition model should reconcile or document why they differ.
Questions for the buyer’s advisers before closing
- What is included in the buyer’s total tax basis, and which transaction costs must be capitalized?
- What is the transaction-date fair market value of the land relative to the improvements?
- Which valuation evidence is appropriate, and what limitations does each source have?
- Does the purchase include excess land, intangible rights, business assets, or tenant-owned property?
- Do the purchase agreement, appraisal, closing statement, and fixed-asset schedule use consistent allocations?
- Which depreciable assets may have shorter recovery periods, and what evidence supports their ownership and classification?
- When was each asset acquired and placed in service?
- How do federal elections, state conformity, passive-loss and at-risk rules, recapture, and the expected exit change the modeled result?
The brokerage role
Stonecliff is a commercial real estate brokerage. We help net lease buyers evaluate the property, lease economics, tenant credit, site, transaction structure, capital exposure, and available diligence. Those facts can give the buyer’s appraiser, CPA, attorney, and cost-segregation professional a sounder starting point. Stonecliff does not determine tax basis or prepare tax allocations.
Important tax and legal disclosure
Stonecliff is a commercial real estate brokerage and does not provide tax, legal, accounting, engineering, appraisal, valuation, or cost-segregation advice. This article is general educational information, is not taxpayer-specific advice, and does not promise any tax result. Facts and federal and state laws vary and can change.
Before acquiring, improving, leasing, exchanging, selling, filing a return, or claiming a deduction, readers should verify asset ownership and eligibility, tax basis and land allocation, calculations, valuation support, acquisition and placed-in-service timing, prior use, related-party status, state conformity, passive-loss and at-risk treatment, depreciation recapture, elections, documentation, reporting, and transaction consequences with their own qualified tax and legal advisers.
Primary sources reviewed: IRS Publication 551 (12/2025), Basis of Assets; IRS Publication 946 (2025), How To Depreciate Property; IRS Topic No. 704, Depreciation; and IRS release IR-2026-06 concerning Notice 2026-11.
Underwrite the site before relying on the deduction.
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