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Farmland Purchase Price Allocation: How to Split Land From Improvements

Short answer: When you buy farmland or a ranch for one price, IRS guidance says you allocate that price among the land and each improvement on it, generally in proportion to their fair market values when you bought it. Land itself is never depreciable. Many improvements, such as fences, wells, drainage tile and farm buildings, may be, each over its own recovery period. The allocation sets your basis for depreciation now and for gain or loss when you sell.

Why the allocation matters

A farm purchase is rarely just "land." The price usually covers bare ground plus fences, water wells, drainage systems, barns, single-purpose livestock or crop structures, grain bins, and sometimes equipment or breeding stock. IRS Publication 225, Farmer's Tax Guide, says that if you buy multiple assets for a lump sum, you allocate the amount you pay among the assets and use that allocation "to figure your basis for depreciation and gain or loss on a later disposition."

If everything stays lumped into "land," there is nothing to depreciate, because the IRS states plainly that you can never depreciate the cost of land. If the improvements are identified and valued, each may be depreciable over its own recovery period, depending on your facts.

What IRS guidance says about how to allocate

From Publication 225, chapter 6, Basis of Assets:

  • Land and buildings: allocate the cost basis according to the respective fair market values of the land and the improvements at the time of purchase. The basis of each asset is the lump sum multiplied by a fraction: that asset's fair market value over the fair market value of the whole property.
  • Fair market value is the price at which property would change hands between a willing buyer and a willing seller, neither having to buy or sell, both with reasonable knowledge of the relevant facts. Sales of similar property around the same date can help establish it.
  • A contract allocation: you and the seller may agree in the sales contract to a specific allocation of the price among the assets. Publication 225 says that if the allocation is based on the value of each asset and the two of you have adverse tax interests, it will generally be accepted.
  • Buying a whole farming business: if the assets make up a farming business, special allocation rules apply (the residual method, reported on Form 8594, Asset Acquisition Statement Under Section 1060). Publication 551, Basis of Assets, has the details.
  • Closing costs: settlement fees and closing costs for buying the property are generally part of your basis. Loan costs are not.

Which parts of a farm can be depreciated, and over how long

Publication 225, chapter 7, Table 7-1 (Farm Property Recovery Periods) lists the general depreciation system (GDS) periods for common farm assets, including:

Asset (as named in Pub 225, Table 7-1) GDS recovery period
Fences (agricultural) 7 years
Grain bin 7 years
Agricultural structures (single purpose) 10 years
Drainage facilities 15 years
Water wells 15 years
Farm buildings (other than single-purpose structures) 20 years
Cattle (dairy or breeding) 5 years

Land is not on the list. Publication 225 notes that the cost of land generally includes the cost of clearing, grading, planting and landscaping. Recovery periods, methods and elections depend on the asset, when it was placed in service and your situation. Publication 946, How to Depreciate Property, covers the general rules.

What to have in hand

  • The purchase contract, including any allocation schedule.
  • The settlement statement.
  • An appraisal, or other support for the value of each improvement (age, condition, replacement-cost evidence, maps of tile or water lines).
  • Records of anything you have added since closing.
  • The returns you have filed since the purchase, so you can see how the property was actually reported.

If you've already closed and filed

If the purchase was reported as all land, or the improvements weren't broken out, a correction may be possible. Whether it goes on an amended return or an accounting-method change depends on how many returns have been filed that way. See IRS Publication 946, "How Do You Correct Depreciation Deductions?", and the IRS page "Time you can claim a credit or refund"

Where DeepYield fits

DeepYield is a second set of eyes, not a replacement for your CPA. In a free two-year look-back, we do a review of your last two years of returns, done for you, including how a land purchase was allocated and depreciated, and we share what we see with you and your CPA. We look for every legitimate deduction and credit your operation qualifies for, not just the obvious ones.

Request your free two-year look-back →

Frequently asked questions

Can I deduct the purchase price of farmland?

No. Land is not depreciable, so the part of the price allocated to land is not deducted while you own it. It becomes part of your basis, which matters when you sell. Improvements on the land may be depreciable over their own recovery periods (IRS Pub 225, chapters 6 and 7).

How do I allocate the price between land and improvements?

IRS Publication 225 says to allocate it according to the fair market values of the land and each improvement at the time of purchase. You and the seller can also agree on an allocation in the sales contract. An appraisal or other valuation support for each improvement helps document the values.

What farm improvements can be depreciated?

Publication 225, Table 7-1, lists recovery periods for items such as agricultural fences, grain bins, single-purpose agricultural structures, drainage facilities, water wells and farm buildings. Whether and how a specific item is depreciated depends on its facts.

Do I need to file Form 8594 when I buy farmland?

Form 8594 applies when the assets you buy make up a trade or business, such as a going farming operation, and the residual allocation method applies. Many purchases of land alone are not business acquisitions. Ask your CPA which applies to yours (see Pub 551 and the Form 8594 page on irs.gov).

What if my farm purchase was reported as all land?

It may be possible to correct, through an amended return or an accounting-method change, depending on how many returns have been filed that way and on your facts. A look-back can help you and your CPA see whether it's worth pursuing.

Sources

Results depend on your specific facts. No outcome is guaranteed. This is general information, not tax advice; advice is provided only under a signed engagement.

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