Depreciating Land - Legally?

Question

I ran across this article this evening when I was researching some other tax matters:

Who says you can't depreciate land?

The basic procedure seems to be:

1.  Split the improvements from the land

2.  Deed the land to a trust you set up with an independent trustee

3.  Make a trusted adviser the independent trustee and your children the beneficiaries of the trust

4.  Create land lease

The lease would the be deductible.  The delta between your marginal rate and that of your children seems to be the savings.

Has anyone ever heard of this?  If you own quite a bit of expensive land this would seem to be something potentially fairly lucrative to generate some extra deductions for those paying high taxes.

David Krulac · Answer

@Bryan Hancock

Lets say you owned a mobile home park where are the homes were owner occupied.  The accouterments of the land could be depreciated, even though the land could not.

Or say you owned a surface parking lot, the asphalt could be depreciated though the land itself could not.

Or at an apartment complex, the swimming pool, tennis courts, playground equipment, and other improvements could be depreciated though the land it self could not.

Somebody I know owns land under a national chain hotel.  He doesn't own any of the improvements as the sidewalk, driveway, parking lot etc belong to the hotel owners, so my friend owns no depreciateble asset.

Roy N. · Answer

Bill Gulley

A bit of sarcasm on my part that failed to make its point.

Bill Gulley · Answer

No, that is, nor is any of this land, these are all improvements. Land is absolutely under no circumstance in this universe a depreciated asset.

Trees are not depreciated, they are assets that are depleted such as crops are. Depletion is much like depreciation but it is not the same.

Everything you listed are improvements to land, including the wire running under the paved parking lot to the light poles.

Land is the dirt, it is never under any circumstance depreciated.

What is mentioned above is the lease being subject of depreciation, not the dirt.

There is only depreciation or depletion under tax code, it is the nature of the tax beast, it is an economical concept as to devaluing an asset arising from it's use which may or may not be a financial limitation or reduction, but done to illustrate the lesser of utility of improvements.:)

Steven Hamilton II · Answer

Want the truth?  You could accomplish the same thing keeping the property in a partnership with your kids.  The problem comes the land is never actually depreciated.  You simply are adding a deduction by paying rent. Instead split the rental income 3 ways or consider a Family Limited Partnership.

If you have a business, always have the real estate held separately from the business.

Feel free to ask on the other tax matters.

Roy N. · Answer

Bill,

You've never been to northern Alberta.   Whether the tax code allows for it or not, the dirt is being depreciated ... an area larger than "BosWash" and growing.

Steven Hamilton II · Answer

Bill Gulley

Trees CAN be a depreciated under proper provisions.

Depletion runs with deforestation projects and such.

Bill Gulley · Answer

No idea what you're talking about Roy. Two sides of depreciation and depletion, one is taxes, the other is under GAAP, accounting and economic factors to address the utility nature of an asset, consumable assets, dirt is not consumable. You can deplete the asset, do away with it for example, a rock quarry or mining minerals out of the land. You can certainly make land less valuable, but you'll never do away with it to the center of the earth. :)

Bill Gulley · Answer

Yes, the ex was the comptroller for Boise Cascade paper mill in LA a few thousand acres of long leaf pines are depleted, I can see trees being improvements as well. My point was the dirt not being depreciated. :)

Bryan Hancock · Answer

I spoke to our accountant about this and it didn't seem to make sense unless the land had a LOT of value relative to the overall project.  Any other comments are appreciated.

David Krulac · Answer

As @Steven Hamilton II  says the land is never depreciated.

There are some components of the land that could be depreciated, but are typically not itemized as such.

For example:

Trees & shrubs have a certain life span and destroyed over time

Sidewalks

Driveways

Underground pipes

Septic systems

Parking lot

Outside light standards

Depreciating Land - Legally?

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