Any time you purchase an asset, whether a new car or an entire business, you have to consider the long-term value of that asset. Is it going to see a sharp price increase in the coming years, or will it lose value with each passing month? That can have a significant impact on the quality of your investment.
One way investors look at this is via depreciation.
Depreciation is a significant concern for investors with some complex ins and outs, and when it comes to land ownership, it’s an even bigger mess. So, let’s take a look at does land depreciate in value.
What is Depreciation?
Depreciation is the loss of value in an asset due to inherent problems with the asset. For example, let’s say you purchase a brand-new car. It has never been driven before, all the parts are in mint condition, and it is quickly selling for its MSRP. Then, you drive it off the lot.
The second you buy that car, it loses value. Now, it has had at least one owner. Naturally, you’re going to drive it, too. That puts stress on the car’s parts, and it takes away from its expected lifespan.
This is accounted for as “depreciation.”
Because of this, depreciation is tax deductible. When your asset loses value in this manner, you can actually cut your tax payments by a proportionate amount to make up for that loss of value. With a standard loss of value, you don’t get to do that. You simply accept the loss and move on. MOST tangible fixed assets can depreciate and count as tax deductible.
This doesn’t seem relevant, but it comes into play with land assets in a unique way.
The Unique Situation with Land Assets
Land assets are considered tangible fixed assets, just like the car we used as an example above. However, there’s a major difference. The land doesn’t predictably lose value over time. If you let your land sit for twenty years, plant life will grow, and structures on the property might fall apart, but the land itself won’t predictably degrade. There’s no real shelf life on it.
As such, land assets are one category of fixed assets that actually don’t depreciate.
Yes, land assets can lose value. They can fall into disarray due to poor ownership, or neighboring land plots might do things that lower your land’s value. However, those aren’t considered depreciation. The land is still a fully functional plot of dirt.
The reason this is so important is that you can’t claim depreciation on your taxes if your land assets lose value. You either have to increase your land’s value again, or you have to accept the loss.
This can become a major hurdle when you’re trying to sell your land because you can’t take a lower price and write off the loss.
For that, we recommend listing your land for auction on the Auction Flippers site. We can help you get the most for your land and overcome value loss.