What is the difference in how to account for land and land improvements?
Definition of Land Improvement
Land improvements consist of site preparation and site improvements (other than buildings) that ready the land for use. The costs associated with improvements to land are added to the cost of the land.
If these improvements have a useful life, they should be depreciated. If there is no way to estimate a useful life, then do not depreciate the cost of the improvements. If land is being prepared for its intended purpose, then include these costs in the cost of the land asset. They are not depreciated.
To properly account for land improvements, a business needs an account entry in the general asset ledger. Any improvements that you make will debit your expense account and credit the land improvements account.
Land improvements are generally charged to the Land account. 5. Once cost is established for a plant asset, it becomes the basis of accounting for the asset unless the asset appreciates in value, in which case, market value becomes the basis for accountability.
This asset category includes the cost of parking lots, sidewalks, landscaping, irrigation systems, and similar expenditures. Why separate land and land improvement costs? The answer to this question will become clear when depreciation is considered. Land is considered to have an indefinite life and is not depreciated.
Land Improvements will be depreciated over their useful life by debiting the income statement account Depreciation Expense and by crediting the balance sheet account Accumulated Depreciation: Land Improvements.
- Retaining walls.
- Parking lots.
- Most landscaping.
Land improvements include such items as excavation, non-infrastructure utility installation, driveways, sidewalks, parking lots, flagpoles, retaining walls, fences, and outdoor lighting.
Land Improvement Definition
Land improvements consist of site preparation and site improvements (other than buildings) that ready land for its intended use. The costs associated with improvements to land are added to the land value.
What is the depreciation method for land improvements?
Depreciable land improvements generally have a recovery period of 15-years under MACRS. The 150-percent declining balance method applies.
The outdoor lighting for commercial rental property would be considered a land improvement (as long as it's not part of the building structure):
Because land is typically the least liquid asset a business owns, it's classified as a fixed asset on your balance sheet.
Land improvements include swimming pools, paved parking areas, wharves, docks, bridges, and fences".
- The original acquisition price.
- Commissions related to the acquisition.
- Legal fees related to the acquisition.
- Cost of surveys.
- Cost of an option to buy the acquired land.
Land can never be depreciated. Since land cannot be depreciated, you need to allocate the original purchase price between land and building. You can use the property tax assessor's values to compute a ratio of the value of the land to the building.
The d) closing costs on purchasing the land would not be recorded as a land improvment.
Certain land improvements can be depreciated over 15 years at a 150% declining balance, with certain personal property depreciated over 7 or 5 years at a 200% declining balance.
- real estate commissions.
- title search and title transfer fees.
- title insurance premiums.
- existing mortgage note or unpaid taxes (back taxes) assumed by the purchaser.
- costs of surveying, clearing, and grading.
In accounting terms, the official definition of land improvement is an enhancement to a plot of land that makes it more usable. In many cases, this can be applied to the addition of a shed.
Is demolition a land improvement?
If land and building are purchased with the initial intent to use the land and demolish the building, capitalize the cost to demolish the building as land improvement.
Land improvements are any enhancements made to a piece of land to increase its value or usefulness. In this case, adding a parking lot would be considered a land improvement. However, the other options mentioned - property taxes, title insurance, and real estate commissions - are not recorded as land improvements.
Land improvements are recorded separately from land, because land improvements have a limited life and are depreciated. Land is assumed to last indefinitely and will not be depreciated. Land improvements are recorded in a general ledger asset account entitled Land Improvements.
Since most land improvement jobs have a 15 year depreciation period, you are able to use bonus depreciation for these expenses. Some examples of land improvement that allow for bonus depreciation include: Excavating.
Qualified improvement property is broadly defined as an improvement made to the interior of nonresidential real property whether or not the improvement is made to leased property. It is depreciated over 15-years using the straight-line method under MACRS and qualifies for bonus depreciation and section 179 expensing.