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Real estate plays a significant role in the world of investment, and land is a cornerstone of many property transactions. Land typically appreciates in value as demand for property rises. However, there’s more to this topic to explore, especially from a tax perspective. Let’s dive deeper into what you should know about land depreciation.

Defining Depreciation

The Internal Revenue Service (IRS) considers depreciation to be the decrease in value of an asset over time, which can occur due to factors such as wear and obsolescence. Businesses can use depreciation as a tax deduction to recoup investments in their assets, but only under certain conditions.

Since land does not degrade or become outdated like buildings do, it does not depreciate in the same way. Equipment and other assets you use on site, however, may depreciate in the tax-related sense. If you own a property that includes land as well as buildings, it’s important to understand how to properly allocate the value between these two components.

A Closer Look at Depreciation

Land is considered to have an indefinite life, and it does not depreciate. In fact, the IRS states that land will never depreciate over time. You can then attribute the remaining value to any structures on the property, which do experience depreciation.

Now, does this mean that a piece of land’s value can never change over time? Not entirely, so let’s take a closer look at what influences land value.

Assessing Land Value

Learning what you should know about land depreciation goes much further than understanding that land doesn’t depreciate. It’s a complex subject, but understanding the value of your real estate is critical because it can change throughout the year. Factors that can cause changes include zoning laws, natural disasters, and environmental pollution. Additionally, land located in areas with declining populations or economic activity may also experience a decrease in value.

So while land may not depreciate in value like buildings and other structures do, property-owners must understand the various factors that can affect its worth over time. Overall, understanding land depreciation is an important part of being a responsible property-owner and ensuring you’re making the most out of your investments. So be sure to stay informed and consult with a professional when necessary to fully understand the potential effects on your land’s value over time.

Doing so can help you make more-informed decisions when it comes to buying or selling land and better plan for your financial future. Browse the farmland real estate available from Midwest Land Management today to get one step closer to owning valuable property yourself.