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The simple answer to such a question is No! The land is not amortized from an accounting point of view.
A land may suffer some deterioration due to erosion, landslides, abrupt change of the relief product of landslides, subsidence or continuous floods that can affect its value or devalue in its entirety, but it is not considered subject to amortization or depreciation, this will be applied in accounting to the structures, improvements or buildings embedded in it.
In accounting, depreciation or amortization refers to the process by which an asset loses value over time as wear and tear, or because it deteriorates or becomes obsolete.
The land, like any asset, can diminish its value, but not amortized in the accounting sense. This is unfortunate for businesses, as asset depreciation can be deducted from taxes as if it were an expense.
We explain in this article why land does not depreciate in accounting and other accounting insights related to this issue.
Why is the land not depreciating?
Accountingcoach.com answers the question why land is not depreciated briefly and forcefully: ” land is not depreciated in accounting because it is assumed that the land has an unlimited useful life.”
The improvements, buildings or structures that are erected on the land, although they are considered long-term assets if they have a defined and limited useful life, therefore, their value is depreciated to be assigned to that number of specific years of use.
For accountingtools.com, the vast majority of assets have a useful life after which they no longer generate income for the company, they are depreciated to reduce their cost to what can be a residual value, however, since the land does not have a defined useful life cannot be depreciated. The land has always been and will always be there.
There are exceptions such as mines and land dedicated to mining exploitation, however, they are assets with an estimated useful life based on their reserves or proven resource stocks and for them a concept similar to depreciation called “depletion” applies. ”.
Depreciation and land
Physical or tangible assets, such as buildings, vehicles, machinery, equipment, and so on, do not last forever.
A new company delivery vehicle, for example, may have a useful life of 10 years, and its value decreases over that period of time. Each year, the business can “claim” the drop in the value of its asset as a tax deductible expense. This is the basic objective of depreciation or amortization.
Under the most commonly used method of amortization, which is straight-line depreciation, the business can claim a depreciation expense of 10 percent of the initial vehicle value over 10 years. The intangible assets, such as accounting software or patents also may be carried forward, because also become obsolete.
Land is a tangible asset, but it is not subject to depreciation, for the simple reason that land does not wear out or become obsolete. As stated by the US Internal Revenue Service (IRS), land “does not have a determinable useful life,” which is a key element in establishing that an asset can be depreciated. For the IRS “the land does not wear out, it becomes obsolete or depleted.”
This does not mean that the land does not lose value. In fact, you can. For example, an area of virgin land in an area of high value in the real estate market may be in high demand, which will be reflected in its value. If demand falls, so will the value of the land, such loss of value is not amortization.
Companies can deduct the loss from the value of the land, but only when they sell the land. Let’s say a company buys a piece of land for $ 10,000. Even if the board is aware that the value of the land is falling, it cannot put this fact on the books, because the land is not amortizable.
If the business later sells the land for $ 8,000, it can establish a loss of $ 2,000 on its income statement for the year the sale occurs, not before.
The costs involved in preparing the land so that the company can use it can be amortized, if they are so tied to other amortizable assets, that you can determine a useful life for them. In short, they are about improvements on the ground and not the land itself.
For example, if you build a new building and plant shrubs around the perimeter of the foundation, those shrubs are essentially part of the building. You cannot demolish the building without removing the bushes, so in this case, they have the same useful life as the building or less.
The cost of landscaping can be amortized with the same scheme as that of the building itself. But expenses to prepare the land that are not directly associated with depreciable assets, with a defined useful life, cannot be depreciated.