You just bought a rental property. It’s a duplex in a neighborhood that’s finally starting to see some gentrification. You paid $450,000 for it. You’re excited because the cash flow looks great on paper. But then tax season rolls around, and your accountant asks how you plan on apportioning the purchase price between the land and the building.
Wait. What?
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Most people think they just bought "a house." In the eyes of the IRS and almost every tax authority on the planet, you actually bought two very different things. You bought a pile of sticks, bricks, and copper pipes that will eventually rot and fall down. That’s the building. You also bought a specific coordinate on the surface of the earth. That’s the land. The building can be depreciated to save you thousands in taxes. The land cannot. If you mess up the math on how you apportion those costs, you’re either leaving a massive check on the table for the government or inviting an audit that will make your head spin.
The 80/20 Rule Is a Total Myth
Seriously. Stop using it.
There is this persistent "expert" advice floating around internet forums and even some old-school CPA offices that says you should just apportion 80% of the value to the building and 20% to the land. It’s clean. It’s easy. It’s also often wrong.
If you buy a beachside condo in Malibu, the land is worth way more than the drywall. Conversely, if you buy a sprawling 4,000-square-foot mansion in a rural part of the Midwest where land is $2,000 an acre, that 20% land allocation is laughably high. The IRS knows this. They have access to the same local assessor data you do.
The goal of apportioning isn't just to pick a number that feels good. It’s about "basis." Your cost basis is the foundation of your entire tax strategy. If you overstate the building’s value, you’re claiming more depreciation than you’re entitled to. If you understate it, you’re paying tax on "phantom" income because you aren't deducting the wear and tear on the structure properly.
How the Pros Actually Do It
There isn't just one way to handle an apportionment. Different situations require different tools.
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The Property Tax Card Method
This is the "good enough" method for most small-time landlords. You go to your local county assessor's website. You look up your parcel. The county will usually have a breakdown: Land Value vs. Improved Value.
Let’s say the county says the land is worth $50,000 and the building is worth $150,000. That’s a 1:3 ratio. Even if you paid $400,000 for the property (way more than the tax assessment), you can use that ratio. You’d apportion 25% to land ($100,000) and 75% to the building ($300,000). It’s defensible because it’s based on a government record.
The Replacement Cost Approach
Sometimes the county records are ancient. Maybe they haven't updated their valuations since 1998. In those cases, you look at what it would cost to actually build that exact house today.
If a contractor tells you it costs $250 per square foot to build, and you have a 2,000-square-foot house, the building's "replacement value" is $500,000. If you bought the whole thing for $600,000, it’s pretty easy to argue that the land is only worth $100,000. This is a common tactic for high-end renovations.
Professional Appraisals
If the stakes are high—we’re talking multi-million dollar commercial deals—you don’t guess. You hire an appraiser to do a formal apportionment report. They look at "comparable" land sales nearby. It costs money, sure, but it’s the ultimate "get out of jail free" card if the IRS ever comes knocking.
What About the "Basket Purchase"?
In the business world, we call this a "basket purchase." You’re buying a basket of assets for one lump sum. It happens when a tech company buys another startup for its patents, its office furniture, and its brand name. They have to apportion the price across all those items.
If you’re buying a laundromat, you aren't just buying a lease. You’re buying washers, dryers, vending machines, and maybe some "goodwill."
The math here is usually based on Fair Market Value (FMV).
$Total Purchase Price \times \frac{FMV of Asset}{Total FMV of All Assets} = Apportioned Cost$
It’s basic algebra, but people skip it because it's tedious. Don't be that person.
The Surprise of "Land Improvements"
Here is where it gets really nerdy and potentially very profitable. There is a third category most people forget when apportioning their purchase: land improvements.
Land itself doesn’t wear out. But fences do. Paved driveways crack. Landscaping dies.
If you can separate "land improvements" from the "land" itself, you can often depreciate those improvements over 15 years instead of the standard 27.5 years for residential property. That accelerates your tax savings. It’s a specialized form of apportionment called cost segregation.
Imagine you spend $20,000 on a new parking lot for a small office building. If you just lump that into "land," you get zero tax benefit. If you apportion it correctly as a land improvement, you might get to deduct a huge chunk of that in year one.
It’s Not Just Real Estate
We talk about property a lot, but apportioning shows up in weird places.
Think about a legal settlement. If you sue someone and win $100,000, how that money is apportioned matters immensely. Is it for lost wages (taxable)? Or is it for physical injury (often non-taxable)?
If the settlement agreement doesn't explicitly apportion the funds, the tax authorities might just decide for you. And they usually decide in the way that results in the highest tax bill for you.
Nuance. That’s what’s missing from most AI-generated financial advice. The reality is messy.
Common Pitfalls to Avoid
- Relying on the Sales Contract: Just because a seller wrote "Land: $10,000" on the contract doesn't mean the IRS has to believe it. They care about economic reality, not what two buddies scribbled on a napkin to save on taxes.
- The "Same as Last Year" Trap: Markets change. If you bought a property next door five years ago, the land-to-building ratio might be totally different now because construction costs have skyrocketed while land values stayed flat (or vice versa).
- Ignoring Demolition Costs: If you buy a property with the intent to tear down the building, the entire purchase price is usually apportioned to the land. You can’t depreciate a building you’re about to wreck.
How to Get Your Basis Right
If you’re sitting there wondering if your current tax returns are a ticking time bomb, don’t panic. You can usually fix these things.
First, get a copy of your most recent property tax assessment. Look at the percentage of value assigned to the "improvements" or "structure."
Second, compare that to your current depreciation schedule. If your tax return says your building is worth 95% of the total value but the county says it’s 60%, you have a problem.
Third, consult a pro. A real CPA—not a software program—who understands the specific real estate laws in your state.
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Apportioning isn't just a math problem. It’s a risk management strategy. You’re building a paper trail that proves you’re acting in good faith.
Actionable Next Steps
- Pull your records. Find the closing disclosure from your last property purchase.
- Check the county site. Look up your parcel ID and find the "Land vs. Improvements" breakdown.
- Calculate your ratio. Divide the improvement value by the total assessed value.
- Audit your CPA. Ask them specifically, "How did we apportion the basis on this property?" If they say "the 80/20 rule," ask them for the specific justification for that number in your local market.
- Document everything. Keep a PDF of the county assessment or the appraisal you used. If you get audited three years from now, you won’t remember why you chose those numbers.
The IRS isn't necessarily looking for perfection, but they are looking for a reasonable, consistent methodology. If you have a logic for how you apportion your assets, you’re already ahead of 90% of the people out there.