Real Estate: Improved Land Definition
The term "improved land" encompasses the spectrum of upgrades that make property more usable and valuable.
When land is assessed by local municipalities for tax purposes, land improvements are factored into the equation. A vacant lot may not have any improvements other than utilities, so it will be assessed accordingly. If a vacant lot is improved by a single-family home being built upon it, the local tax rate will be adjusted based on the size and features of the home. If a garage is constructed two years later, that improvement will further increase the property's tax rate.
From an accounting perspective, most land improvements are depreciable over a 15-year period, or over the estimated lives of those improvements. The commodity of land is not depreciable, as explained by information posted at irs.gov, "You cannot depreciate the cost of land because land generally does not wear out, become obsolete, or get used up." One aspect used to define improved land is that it covers investments that have limited lives.
Some examples of land improvements that are depreciable include sidewalks, driveways, fences, curbs, roads and parking lots.
Improved land can refer to various types of real estate, including agricultural, commercial and rental properties. Some improvements which qualify for depreciation on rental property cannot be deducted in the residential category. Tax experts are familiar with IRS laws and how they apply to depreciating land improvements.
To illustrate how land improvements vary by category, consider some of the improvements that fall under the heading of agriculture:
· Erosion control
· Construction of roads
· Irrigation and drainage
· Soil improvement and stabilization
On the other side of the improved land coin, here are some qualified improvements in an urban setting:
· External lighting systems
· Cleaning and leveling land
Real estate investors who own rental properties often debate whether to make repairs or if it’s more financially advantageous to make improvements instead. Repairs help keep properties running well and in good condition, and are usually tax-deductible the same year the repair is made. Conversely, improvements which add value to a rental property do not necessarily provide immediate tax deductions. Instead, these expenses are recovered by depreciating the cost over the life expectancy of the property.
Rental improvements include items such as:
· New roof
Property owners sometimes choose to make repairs promptly rather then let things deteriorate until improvements are needed to enable faster tax breaks.
When it comes to improved land, the basic rule of thumb is that items have a measurable life expectancy and they bring notable value to the land, they are most likely considered to be improvements.