Introduction
Depreciable property is any asset that has limited useful life. For example, equipment, vehicles, or buildings are all tangible assets that depreciate over time.
Land is often grouped with all long-term assets that are depreciable. However, there is no basis to depreciate land because it does not have useful life.
In this post, we explain in detail what we mean when we say that land has no useful life. We’ll also discuss why it doesn’t depreciate over time like other tangible assets.
What Is Land Depreciation?
Depreciation shows us the value of an asset – like land – over time. It also shows us how much of the asset’s value has been used up in any given time frame.
Land lasts forever – it doesn’t have an expected end date like other tangible properties. For example, personal properties like equipment, furniture, and vehicles have a useful life that can last anywhere from three to twenty years before you have to repair or replace them.
Other fixed assets like buildings, might last even longer – twenty to fifty years before you need to invest in extensive renovations. These will most likely be worth a lot less than their original cost by the time they get to the end of their useful lives.
Land is considered real property that is not subject to depreciation. As the owner of land, you can use it forever without worrying it will deteriorate physically like your car or house would.
Mobile homes also belong to the same category as vehicles and personal property and can depreciate over time.
When Does Land Value Depreciate?
Practically speaking, we can use land forever without fearing the typical consequences of prolonged use of tangible assets, such as:
- Reduction in the market value
- Physical deterioration
- Obsolescence
Although the original cost of purchasing land can never go down, there are instances where land costs have depreciable value.
We can see these exceptions manifest when there are land improvements or when we purchase land for the minerals and other natural resources that it contains.
How Does Land Value Depreciate?
Land depreciation can relate to land improvements or when we purchase land for the minerals and other natural resources that it contains.
Let’s take a look at these two instances to explain how:
1. Depreciation of land improvements
2. Cost of depleting natural resources
Deprecation of land improvement
When we make any sort of land improvements, we consider them as subsequent changes we made to the land.
To understand how land improvements impact the land value, you first need to know that tax experts and accountants separate these land improvements from the land value account in the balance sheet.
Certain land improvements such as landscaping, fencing, drainage, and driveways are considered land costs that can increase the value of land.
However, if you are making changes of a permanent nature, they have only a limited life span, which makes them depreciable.
In this instance, the cost of land is subject to depreciation over the useful life of the improvements.
Cost of depleting natural resources
Depletion and depreciation are two very similar concepts in accounting and both apply to the use of land’s natural resources.
When we purchase a piece of land for the purpose of extracting natural raw materials from it (coal, oil, timber, etc.), we expense its cost gradually.
In this case, the purchase cost of the land encompasses the value of inventory the land stores. Those costs can depreciate.
Since natural resources have a finite life, the owner of the land makes deductions to include the reduction of natural resources.
Why Doesn’t Land Value Depreciate?
Equipment and machines can stay useful for over ten years and longer. After that, they might start to break down.
On the contrary, land’s life is indefinite and its use is infinite. We can’t depreciate land on its own over its useful life.
We can only depreciate an asset if it has these 4 qualities:
- Limited useful life
- Useful life exceeding one year
- Physical form
- Expected reduction in value over its useful life
Even though, land has a physical form as well as a useful life that exceeds one year, it cannot depreciate for two reasons:
1. Tangible properties have an expected end date and land doesn’t because there is no risk of land ever becoming futile.
2. Land’s value usually increases over time and becomes higher than its initial purchase cost.
Mobile homes, on the other hand, meet the full criteria of a depreciable asset. We will discuss the significance of mobile homes as both depreciable and rental property in the next couple of sections.
Factors that may affect land value
Before we look at the factors that may affect your land value, we need to address how we establish the value of land in the first place.
The IRS accepts two main methods in establishing land value:
- Fair market value
- Pro rata land allocations
Fair market value is how we define the highest and best use of land. A licensed appraiser uses a set of methods and procedures for land appraisal to establish fair market value.
Even though experts consider the fair market value and land appraisal the best option for establishing the land value, pro rata allocations are acceptable as the second-best option.
Pro rata allocations use information that is readily available on the taxpayer’s local property assessor’s website.
We can apply the percentage to the new purchase price to determine the land value by taking the ratio of land to total value on the assessor’s website.
The value of land can be impacted by several factors, for example:
- Real estate boom
- Environmental catastrophe
- Land improvements like landscaping, fencing, etc.
- Impairment to the asset like extracting raw natural materials from the land
- Natural causes (for example, earthquake that hits and devastates an area or mining activity that completely exhausts resources)
- Depleted land (for example, a mining activity that completely exhausts resources)
Junk in the yard – like an old mobile home at the end of its useful life – is another important factor that can affect land value.
If, for example, you have an old mobile home on your property that’s no longer in use, you might increase your land value by removing it.
Land Value and Future Planning
You can always find ways to maximize the value of your land in the future. Land improvements are one of the most effective ways to achieve this.
Some of the most common land improvements in development pressure zones are fencing, utilities, and blacktop driveways. Adding a utility service like power or sewer lines also falls under the category of land improvements.
Rental properties like a building, house, or mobile home, are depreciable assets. Since they have physical form and limited useful life, they are considered depreciable assets.
Real Estate Depreciation
To deduct market value loss and the costs of buying and improving a property over its useful life from your taxes, tax professionals and land agents will use real estate depreciation as their method.
The IRS allows you to deduct a specific amount from your taxable income every full year you own and rent a residential property, including mobile homes.
While you cannot depreciate the land the mobile home is on, you can depreciate the value of the mobile home.
Consult your tax professional and land agent in your area to discuss what depreciates and what sells.
Does clearing land increase land value?
Clearing land can also maximize your land value, since the curb appeal of land plays a major role in attracting prospective buyers.
Curb appeal is the aesthetic attractiveness of a property, as viewed from some distance by a prospective buyer according to Investopedia.
Buyers assess the curb appeal by available services and factors like:
o the quality and upkeep of the property
o the elimination of debris
o junk in the property, such as old mobile homes
When your potential buyers see your property in a tip-top condition, they count it as a 25/75 split toward their construction cost.
25/75 assessment split is the most common commission divided between the buyers and their real estate agents.
Land buyers calculate the improvement cost into their side of the 25/75 assessment split.
If there are no land improvements or buyers rate your curb appeal as not good enough, that can lower your chances of selling your property.
Removing an old mobile home from your land can improve the curb appeal of your property immensely, however the mobile home removal process can be costly and complicated.
Why Would I Want to Account for Land Depreciation?
Using the depreciation process can help you recover some of your investment cost during the asset’s gradual loss of utility. This is especially true if you own an office building or a residential rental, such as a mobile home.
Your business can benefit from substantial tax savings when you account for land improvement depreciation.
here are a couple of reasons why you should claim depreciation whenever that’s possible:
- It counts as a non-cash expense on your income statement and reduces the amount of tax due on your profits
- It lets you claim depreciation on an older property
- It serves as a record of all aspects that are causing the expansion of your business as it continues to grow
As a rule of thumb, the more depreciation, the better.
Tax benefits of deducting depreciation also manifest when you sell the property without reinvesting earnings in a new property. This recapture of depreciation you then have to pay will be at a lower rate than usual income rates.
If you have a mobile home that you rent out, it’s considered a dwelling unit used to provide living accommodations and it’s taxable.
The IRS determines “the useful life” of the mobile home you’re renting first and then measures the amount of income you can deduct based on that. Under GDS, the useful life of residential rental property is 27.5 years.
You can use the amount of value lost due to depreciation each year and claim the deduction on your taxes.
Conclusion
Land is a non-depreciable asset. However, your rental property on your land, such as a mobile home, is considered as a land improvement that has a limited useful life.
The value of improvements declines over time for tax purposes. This makes your residential rental property a tangible asset that is depreciable.
You might have a mobile home that is at the end of its useful life and is no longer in use. Removing the mobile home can improve the curb appeal of your property, increase the value of your land and your chances of selling it.
But mobile homes are also not easy to remove. If you choose donation as your option, Banyan Home does the removal for you.
Banyan is a non-profit that pairs old mobile homes with families and individuals in need of a shelter. Donation is the best choice for mobile home removal if you’re looking for a quick, safe, and free option. Donations also come with a tax refund.If you’re interested in donating, contact Banyan Mobile Home Removal and we’ll take away your mobile home at no cost to you.