15-Year Land Improvements in a Cost Segregation Study: A $1.5 Million Retail Example

Most investors think of cost segregation as moving interior items such as flooring and fixtures into short lives. For commercial properties with big lots, the outdoor work can matter just as much. This article shows how land improvements work in a study.

This is general education, not tax advice. Your CPA should confirm how the rules apply to you. For background, see the complete guide to cost segregation.

What counts as a land improvement

Land itself is never depreciable. Improvements made to land are, and the IRS audit guide treats many of them as 15-year property. Typical items:

• Parking lots and curbing
• Sidewalks and paving
• Landscaping and irrigation
• Fencing and retaining walls
• Site lighting

Whether a given item is a land improvement or part of the building depends on its function and the facts. The IRS guide notes there is no bright-line test for sorting building property from other property. The IRS audit techniques guide explains the approach. Some site-preparation costs may be depreciable along with the improvement they support. Ask your preparer how they treated them.

Why 15-year property matters

Property with a recovery period of 20 years or less qualifies for bonus depreciation. That includes 15-year land improvements. For property acquired after January 19, 2025, the rate is 100%. The IRS explains the rule in its announcement of Notice 2026-11.

The example

• Purchase price: $1,500,000 for a small retail center with a large parking lot
• Land allocation: $300,000
• Depreciable basis: $1,200,000
• Acquired after January 19, 2025

A study finds: These amounts are assumptions for the example. Your study will differ. Without a study: $1,200,000 over 39 years is about $30,800 per year. With a study:

• Bonus depreciation on the $264,000 of 5, 7 and 15-year property: $264,000
• Straight-line on $936,000 over 39 years: $24,000
• Year-one depreciation: about $288,000

That is about $257,200 more than the baseline. At a 24% federal rate it is about $61,700, and at 37% about $95,200. The figures ignore the mid-month convention and state tax. The land improvements alone account for $144,000 of the first-year deduction.

Limits to check

• Passive rules. If you rent the center to tenants, the loss is generally passive. If your own business occupies it, the depreciation can offset business income. See the limits in the complete guide.
• Recapture. Gain on land improvements is generally recaptured as ordinary income up to the depreciation claimed when you sell at a gain. See depreciation recapture.
• Documentation. A study should list each improvement, its cost and the method used to assign it. Photos and construction records help.
• Already own it? You can generally claim missed depreciation with Form 3115. See how to file Form 3115.

See your own numbers

Run an estimate in the ROOM42 calculator, or read about restaurants, where site work is often a large share.