Land Depreciation

Does Land Depreciate?

Land is an asset of the company which is having the unlimited useful life, therefore, no depreciation is applicable to the land unlike the other long term assets such as buildings, furniture, etc which have the limited useful life and hence their costs to be allocated to the accounting period in which they are of some use to the company.

Land, although a tangible fixed asset, does not depreciate. Land cannot get deteriorated in its physical condition; hence we cannot determine its useful life. It is almost impossible to calculate land depreciation. The value of land is not constant on a long-term basis – it may enhance or may as well deteriorate. In other words, it is fluctuating. Hence, it gives an uncertain picture of the asset value, which is why calculations are difficult.

Land Depreciation Examples

Example #1

In a hypothetical example, a value of a particular piece of land is $300,000 in the year 2002. After 2 years, the value increases steadily and goes up to $350,000. Due to the real estate boom in the location during 2006, the value goes up to $500,000 (prices shooting up on the graph). However, due to a crisis in 2008, the value then goes down to $250,000 (nearly half in 2 years). If a graph is drawn for these values it would be like:

value of land

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For eg:
Source: Land Depreciation (wallstreetmojo.com)

In this case, the value of land fluctuates. Understanding from depreciation point of view, an asset whose value reduces within a given period of time, can be used for calculating depreciation.

Example #2

A piece of land was a marshy area in 2005. It was converted into a usable land in 2008 when real estate products were at their peak, by dumping sand and other material and were turned into a solid lot of land. The value of this piece went up manifold, and the land was in great demand. As and how developments were done, the property prices went up and up. In 2010, unfortunately, the land was hit by an earthquake and the entire development made over the land was devastated. The land itself got worn out in a manner that was unable to be used again. In this case, the land value dropped down drastically. This shows that although the land is vulnerable, its value cannot be periodically and equally reduced over time. Moreover, understanding with this example, we can say that land does not have its own particular useful life. It was due to the earthquake in 2010 (which may have occurred in any other year later or earlier), that the value went down; or the development made in 2008 due to which its value rose high.

In accounting practicesAccounting PracticesAccounting practice is a set of procedures and controls used by an entity's accounting department to keep track of accounting records and entries. Other reports are generated based on accounting records, such as financial statements, cash flow statements, fund flow statements, payroll, tax workings, payment and receipts statements, and so on, and they form the basis of the auditor's reliance while auditing the financial statements.read more, depreciation can be calculated only for those items which have a particular value at the beginning of their useful life, and that particular value deteriorates over a period of time. This is the reason, why “land” does not qualify for depreciation.

Accounting Effects for Change in Values of Land

The value of land can change over a period of time.

Hence, the land per se does not have any effect of depreciation, although the value of such land grows manifold after the building gets constructed.

Final Thoughts on Land Depreciation

Depreciation is an important calculation in accounts. The amount, which is deducted from the value of any tangible asset in cash flow or a balance sheet at any point in time, can be claimed as a non-taxable item. As it gets reduced from the value of the asset, the tax which is calculated on revenue after all deductions and/or additions excludes depreciation.

However, everything said and done, it is important to understand that “Land does not depreciate”.  When we use the term depreciate here, we sincerely refer to the accounting term “depreciation”. In a literary sense, it does depreciate, meaning, there may be deterioration in its value, however, from an accounting point of view, we cannot pass any entries in the system for such deterioration in the name of depreciation.

In this article, we answer the question – Does Land Depreciate? Here we discuss land depreciation with examples and accounting effects with the changes in the value of land. You may learn more about accounting basics from the following articles –

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