Depreciation on Land Improvements: Parking, Fencing, Landscaping

Land improvements are 15-year property, separate from both the land and the building

Publication 946 lists as 15-year property certain improvements made directly to land or added to it, such as shrubbery, fences, roads, sidewalks and bridges. The IRS Cost Segregation Audit Techniques Guide quotes asset class 00.3 of Rev. Proc. 87-56 for the fuller list: sidewalks, roads, canals, waterways, drainage facilities, sewers, wharves and docks, bridges, fences, landscaping, shrubbery and transmitting towers. Buildings and their structural components are specifically excluded.

The guide's matrices place a grade-level surface parking lot, including bumper blocks, curb cuts, striping, landscaped islands, perimeter fences and sidewalks, in class 00.3 at 15 years. A parking structure, by contrast, is a building at 39 years. Publication 946 also warns that if your business activity class in Table B-2 specifically includes land improvements, that class's recovery period controls instead.

Not everything done to the site is an improvement. Publication 946 says the cost of land generally includes clearing, grading, planting and landscaping, though landscaping closely tied to a depreciable building can be depreciated with it. Raw grading for the lot itself therefore usually stays in nondepreciable land.

The default method is 150 percent declining balance, and 2026 acquisitions can take 100 percent bonus

Publication 946 assigns 15-year property the 150 percent declining balance method over the GDS recovery period with the half-year convention, switching to straight line when that gives a larger deduction. You may elect straight line instead, or ADS over 20 years.

Bonus depreciation covers tangible MACRS property with a recovery period of 20 years or less, which includes land improvements. Public Law 119-21 restored the 100 percent allowance for qualified property acquired and placed in service after January 19, 2025; Publication 946 says it applies unless you elect out, and you can elect 40 percent instead for the first tax year ending after that date. The 2025 tax act page covers the wider changes.

An electing real property trade or business that avoids the business interest limit must use ADS for its buildings and qualified improvement property, but Publication 946 does not list land improvements in that group, so they keep their 15-year life and bonus eligibility. Section 179 is not available: Publication 946 states that land improvements, including paved parking areas and fences, are not section 179 property.

At sale the accelerated part comes back as ordinary income, not at the 25 percent rate

Whether a land improvement is section 1245 or section 1250 property depends on its use. The audit guide notes that class 00.3 covers both. A parking lot at a rental building or shopping center is section 1250 property because it is not an integral part of manufacturing or a utility service; the section 1245 recapture page covers the exceptions.

Under section 1250(a), the additional depreciation, meaning depreciation in excess of what straight line over the same recovery period would have produced, is ordinary income to the extent of the gain, at an applicable percentage of 100 percent for ordinary rental and commercial property. Reg. section 1.168(k)-2(g)(3) says bonus depreciation is not a straight line method for section 1250, so nearly all of a bonus deduction is additional depreciation in the early years.

The straight-line portion is unrecaptured section 1250 gain capped at 25 percent under section 1(h)(6), and any remaining gain is section 1231 gain. Ordinary income in 2026 is taxed at the regular rates, up to 37 percent above $768,700 of joint taxable income under Rev. Proc. 2025-32.

A worked example: bonus on a parking lot, then a sale four years later

Hypothetical, round numbers. You buy a small retail center in 2026 and a cost segregation study assigns $300,000 to the parking lot, curbs, sidewalks, fencing and landscaping. You take 100 percent bonus and deduct the full $300,000 in 2026, so the improvements' adjusted basis is zero.

You sell in 2030 and the purchase agreement allocates $200,000 of the price to those improvements. Straight line over 15 years with the half-year convention would have allowed about $80,000 through the year of sale, so additional depreciation is about $220,000. The $200,000 gain on the improvements is less than that, so all $200,000 is ordinary income under section 1250(a).

Had you used straight line instead, you would have deducted about $80,000 by 2030, your basis in the improvements would be about $220,000, and the same $200,000 allocation would produce a small section 1231 loss rather than $200,000 of ordinary income. Bonus is still often worth taking for the time value of the deduction, but the trade is a deduction at your rate now for ordinary income at your rate later. Run your own numbers with your CPA, including how the sale price is allocated among land, building and improvements.

An exchange defers the ordinary recapture if the replacement carries enough real property

Section 1250(d)(4) limits section 1250 recapture in a like-kind exchange to the greater of the gain recognized or the amount by which the recapture exceeds the value of section 1250 property you acquire. Exchanging into other real estate, including an interest in a Delaware statutory trust, therefore defers the ordinary recapture along with the capital gain, as does a 1031 defer depreciation recapture explains.

If you take boot, recapture is recognized first. The page on whether boot is taxed as recapture or capital gain first walks through the ordering. Buying replacement property with new site work restarts the cycle: the bonus depreciation on replacement property page covers what can be expensed after an exchange.