Depreciation is a technical term used by the Internal Revenue Service to describe the process of writing off a capital asset’s purchase price over time to simulate its gradual decrease in value. The IRS won’t let you depreciate personal residences, so you can’t take advantage of this write-off for your personal home. Since they also don’t allow you to depreciate land, you can’t use it for a residential investment property, either.
Why Land Isn’t Depreciable
Depreciation simulates the gradual breakdown of a capital asset. For example, computers get depreciated over five years based on the assumption that they need replacement after that time. Unless something unexpected happens like an earthquake opening up a crevice that swallows your land, your land should be the same 100 or even 1,000 years from now as it is today. As such, it doesn’t intrinsically lose value and cannot be depreciated.
Investment Property Land Improvements
There is a loophole, though. If your residential land is held for investment purposes and you improved it by excavating a space for a basement, filling in holes or installing landscaping for a home, you can depreciate the cost of those improvements. The IRS lets you write off the cost of land improvements over a 15-year period.
Earthquakes and Other Disasters
If your residential land loses value due to an earthquake, tidal wave or other natural disaster, your loss, called a “casualty loss,” could be tax deductible. The IRS will let you deduct casualty losses that aren’t reimbursed by insurance as a part of your itemized deductions on Schedule A. Everything but the first $100 of a casualty loss is deductible to the extent it exceeds 10 percent of your adjusted gross income. For example, if your $200,000 beach lot on the Big Island of Hawaii is covered in lava from an eruption, you’d be able to deduct $179,900 of it if your AGI was $200,000 and if you were uninsured.
Losing Value on Residential Land
Outside of the depreciation process, residential land can lose value due to market conditions. If the area becomes undesirable because of demographic shifts, deteriorating school districts or major employers living, most buyers won’t be willing to pay as much to live in the area, depressing demand and, with it, land values. Larger macroeconomic trends, like the real estate contraction that occurred during the Great Recession, can also cause your land to lose value.
ref.link: http://homeguides.sfgate.com/residential-land-value-depreciate-72175.html