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

Author:
Harold Averkamp, CPA, MBA

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
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About the Author

Harold Averkamp

For the past 52 years, Harold Averkamp (CPA, MBA) has
worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com.

Learn More About Harold

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