# How do you divide the cost of real estate into land and building?

## Dividing the Cost of Real Estate into Land and Building

In accounting, the cost of real estate must be divided into:

• The cost of land (because land is not depreciated)
• The cost of the structures (because these require depreciation)

## Example of Dividing the Cost of Real Estate

Assume that a company purchases real estate (which includes land and a building) at a cost of \$220,000. The appraisal at the time of the purchase indicates that the land has a market value of \$50,000 and the building has a market value of \$200,000...for a total market value of \$250,000. In other words, the appraisal indicates that the land is 20% (\$50,000/\$250,000) of the market value, and the building is 80% (\$200,000/\$250,000) of the market value.

The cost principle requires that the purchase be recorded at its cost of \$220,000. However, we can use the appraisal amounts as a logical way to divide up the cost of \$220,000 between land and building. Here is one approach:

• Assign or allocate \$44,000 to the account Land. This is 20% of the \$220,000 cost.
• Assign or allocate \$176,000 to the account Buildings. This is 80% of the \$220,000 cost

A second approach is to compare the real estate's total cost of \$220,000 to the total appraisal amount of \$250,000. This shows that the total cost is 88% (\$220,000/\$250,000) of the total market value. Using this approach we will:

• Assign or allocate 88% of the \$50,000 market value = \$44,000 to the Land account
• Assign or allocate 88% of the \$200,000 market value = \$176,000 to the Buildings account