Which Asset Cannot Be Depreciated? [Comprehensive Guide].

When managing business assets, depreciation plays a critical role in accurately reporting expenses and maintaining financial transparency. Depreciation reflects the wear and tear of assets over time, aligning cost with revenue generation. However, not all assets are depreciable—and understanding which assets fall outside the scope of depreciation is essential for compliance and efficient accounting.

So, which asset cannot be depreciated?

The short answer: Land.

But there’s more to it. In this guide, we’ll dive deep into:

• What depreciation means
• How depreciable assets are identified
• Why land is exempt
• Common misconceptions
• IRS rules and best practices

What is Depreciation?

Depreciation is the process of allocating the cost of a tangible asset over its useful life. Businesses and individuals use depreciation to reduce taxable income by writing off the expense of using certain assets.

Depreciation is typically applied to tangible fixed assets, such as:

• Buildings
• Machinery
• Vehicles
• Equipment
• Furniture

Each of these assets loses value over time due to:

• Usage
• Obsolescence
• Wear and tear

This loss in value is reflected as an expense in financial statements, helping match revenues and expenses in the period in which they are incurred.

Why Can Some Assets Not Be Depreciated?

Not every asset experiences a loss in value over time. Certain assets either:

• Do not deteriorate,
• Or are not held for business or income-producing purposes.

The IRS and accounting standards only allow depreciation for assets that:

• Are owned
• Are used in business or to produce income
• Have a determinable useful life
• Are expected to last more than one year

If an asset doesn’t meet these criteria, it cannot be depreciated.

Which Asset Cannot Be Depreciated?  LAND

The main asset that cannot be depreciated is land.

Here’s why:

• Land does not wear out or get used up.
• It has an indefinite useful life.
• It is not subject to obsolescence in the same way buildings or machines are.

Example:

A company purchases a piece of real estate for $500,000. The land is worth $200,000 and the building is valued at $300,000.Only the $300,000 for the building is depreciable. The $200,000 land value is not depreciated.

Other Assets That Are Typically Not Depreciated

Aside from land, other non-depreciable assets may include:

AssetReason Not DepreciatedPersonal-use propertyNot used for business or income-producing purposesInventoryAccounted under cost of goods sold (COGS)Investments (e.g. stocks)Considered capital assets; gains/losses reported separatelyCurrent assets (e.g. cash, receivables)Not long-term assetsLeasehold improvements (in some cases)May be amortized instead of depreciated

Depreciation of Land Improvements vs. Land

It’s important to distinguish land from land improvements.

FeatureDepreciable?ExampleLandNoRaw land, pasture, undeveloped plotLand ImprovementsYesFencing, driveways, landscaping, signs

Note: Land improvements are separate from the land value and have a determinable useful life, making them depreciable.

Tax & Accounting Implications

U.S. IRS Guidelines

According to IRS Publication 946, land is specifically excluded from depreciation:

“You cannot depreciate land because it does not wear out, become obsolete, or get used up.”

Implications for taxpayers:

• When purchasing real estate, you must allocate the purchase price between depreciable property (e.g., buildings) and non-depreciable property (land).
• Overstating land value can lead to understating depreciation, reducing potential tax deductions.

GAAP (Generally Accepted Accounting Principles)

Under GAAP:

• Land is recorded as a non-depreciable fixed asset on the balance sheet.
• It remains at historical cost unless impaired.

Common Misconceptions

• “All real estate is depreciable”→ False. Only the structure is depreciable—not the land.
• “Land held for investment can be depreciated”→ No. Even if held long-term, unless it’s used in business and has a determinable life, land remains non-depreciable.
• “You can depreciate land if it loses value”→ Value fluctuation in the market has no impact on depreciability. Depreciation is about usage, not market value.
• “Vacant land used for farming is depreciable”→ Not the land, but farm buildings, wells, fencing, and irrigation systems may be depreciable.

Best Practices for Asset Classification

To ensure accurate reporting and maximize deductions:

• Conduct property appraisals→ Especially when buying a property. Allocate costs between land and building appropriately.
• Maintain detailed records→ Break down asset purchases into components: land, building, equipment, and improvements.
• Use depreciation schedules→ Use IRS MACRS (Modified Accelerated Cost Recovery System) for qualified assets.
• Consult tax professionals→ Especially for complex asset structures like multi-use properties.

Conclusion

Understanding what can and cannot be depreciated is crucial for proper financial reporting and maximizing tax benefits. While many business assets—such as equipment, buildings, and vehicles—qualify for depreciation, land stands out as the one asset that cannot be depreciated due to its indefinite useful life.

By distinguishing between land and depreciable assets (like improvements or buildings), businesses can ensure compliance with tax laws and avoid underreporting or overreporting expenses.

FAQs 

Q1. Can land ever be depreciated under any condition?

No. Land is inherently non-depreciable because it doesn’t deteriorate, regardless of how it is used.

Q2. Are land improvements depreciable?

Yes. Items like fences, parking lots, or drainage systems are considered land improvements and can be depreciated separately.

Q3. Is leased land depreciable?

No. You do not own leased land, and land itself isn’t depreciable—even if you pay to use it.

Q4. What happens if I accidentally depreciate land?

This can lead to tax inaccuracies. The IRS may disallow those deductions, potentially resulting in penalties and back taxes owed.

Q5. How do I separate land from buildings in a purchase?

Use a reasonable method such as a property appraisal or the local tax assessor’s valuation to allocate value between land and building.