At a glance
- Four different numbers get called “value.” Assessed value, market value, appraised value and tax basis are set by different people for different purposes and are rarely the same.
- The assessor’s land-to-building split drives your depreciation. Publication 527 allows it as a fallback, and most returns use it without ever testing it.
- Winning an appeal on the improvements can cost you. A lower building value relative to land means a smaller depreciable percentage, permanently.
- Appeal windows are local and short. Often thirty to forty-five days from the notice, and missing one means waiting a full cycle.
A county assessor sets a number on your commercial building once a year. That number decides your property tax bill, and it usually ends up deciding something larger: how much of the purchase price you get to depreciate.
Most owners look at the assessment once, as a bill — and file it. It is worth looking at twice, because the same document is doing two jobs with opposite incentives.
Four numbers, four different people
| The number | Who sets it | What it is for |
|---|---|---|
| Assessed value | The county or municipal assessor | Computing the property tax bill. Often a set percentage of market value rather than market value itself |
| Market value | The market | What the property would sell for. The assessor estimates it; the assessment ratio is then applied to it |
| Appraised value | A licensed appraiser, usually for a lender | Underwriting a loan. Prepared to a different standard and frequently a different figure again |
| Tax basis | You, on your return | Depreciation and gain on sale. It starts at what you paid, not at what anyone assessed |
The last row is the one that gets confused most often — and it is the expensive confusion. An assessment does not set your basis, and a reassessment does not change it. Basis starts at cost and moves only for capital improvements, depreciation taken and a handful of specific adjustments. What the assessment can legitimately do is help you split that cost between land and building, and that is where it starts to matter.
How an assessor reaches the number
Three approaches, and which one dominates depends on the property type.
| Approach | How it works | Used most for |
|---|---|---|
| Income capitalization | Net operating income divided by a market capitalization rate | Income-producing property: office, retail, multifamily, industrial |
| Sales comparison | Recent sales of comparable properties, adjusted for differences | Property types that trade often, and vacant land |
| Cost | Replacement cost of the improvements, less depreciation, plus land value | Special-purpose buildings with no comparable sales and no rent roll |
Under the income approach the arithmetic is unforgiving in both directions. A building with $300,000 of net operating income valued at a 6% capitalization rate is a $5,000,000 building. The same income at 5% is $6,000,000. Nothing about the property changed — the market moved, and so did your tax bill.
Mixed-use property is assessed in parts. The commercial floor and the apartments above it can carry different classifications and different rates in the same building, and the split between them is a line worth checking rather than accepting.
Where the assessment reaches your federal return
If you read nothing else, read this. It is the part the property tax bill does not mention.
Land is never depreciable — so a purchase price has to be split. Regulation section 1.167(a)-5 sets the limit: “the basis for depreciation cannot exceed an amount which bears the same proportion to the lump sum as the value of the depreciable property at the time of acquisition bears to the value of the entire property at that time.”
How do you establish those values? Publication 527 offers a fallback, and the conditional at the front of it is the part people skip: “If you aren’t certain of the FMVs of the land and the buildings, you can divide the cost between them based on their assessed values for real estate tax purposes.”
A $3,000,000 commercial building. The assessor splits the total 30% to land and 70% to improvements. An appraisal, commissioned for the purpose, supports 20% and 80%. Figures are illustrative and rounded, and land is shown as its own line because it never depreciates.
| On the depreciation schedule | Assessor’s ratio | Supported appraisal |
|---|---|---|
| Purchase price | $3,000,000 | $3,000,000 |
| Land, not depreciable | $900,000 | $600,000 |
| Improvements, 39-year | $2,100,000 | $2,400,000 |
| Annual depreciation | $53,846 | $61,538 |
| Extra deduction each year | — | $7,692 |
$7,692 a year, and $300,000 over the 39-year life, decided by a ratio nobody on the return chose. At a 35% marginal rate that is roughly $2,700 a year. The assessor’s ratio is an accepted method, not the required one, and it is prepared for a purpose that has nothing to do with your depreciation schedule.
The one-line version. The assessor is splitting your building for their reasons. You are allowed better evidence, and on a large property it pays for itself. Figures are illustrative.
The appeal that works against you
Here is the tension, stated plainly — and it is a real one. Your property tax bill depends on the total assessed value. Your depreciation depends on the ratio of improvements to land inside that total. They are two different questions about the same document.
- Appealing the total down is a clean win. Lower total, lower tax bill, ratio unchanged, depreciation unaffected.
- Appealing the improvements down is not. It is the most common way to argue an over-assessment, and it shifts the ratio toward land. A lower percentage of your purchase price is depreciable, in every remaining year.
- Appealing the land down helps twice, where the facts support it: lower total, and a larger depreciable share.
The appeal is usually run by a property tax consultant or a lawyer who is paid on the property tax saving and has no reason to think about the depreciation schedule. That is not a criticism of them — it is not their job. It is an argument for having the two conversations together, before the appeal is framed.
Reassessment after you build
Improvements trigger reassessment, and the federal treatment runs on a different track. An improvement that increases assessed value is not automatically a capital expenditure, and a repair that does not move the assessment at all can still be immediately deductible. The tests are unrelated — entirely: the assessor is asking what the property is worth, the Code is asking whether the work betters, restores or adapts the property. We work through that line in repairs against improvements.
The practical sequence on a renovation is to keep the invoices coded as you go, decide the federal characterization on its own terms, and treat the reassessment as a separate consequence to be planned for rather than as evidence of anything.
What to do about it
- Read the assessment for the split, not just the total. The land line is the one that costs you money on the federal return, and almost nobody looks at it.
- On a purchase above roughly $1,000,000, get the allocation supported. An appraisal or a cost segregation study establishes the land value properly and pays for itself many times over on the arithmetic above. A study goes further and reclassifies components into 5, 7 and 15-year lives.
- Frame the appeal before you file it. Decide whether you are arguing the total, the improvements or the land, and understand what each does to your depreciation.
- Diarize the appeal window. It runs from the notice, it is commonly thirty to forty-five days, and it is not extendable. Missing it costs a full cycle.
- Keep the property tax deduction straight. Real property taxes on a trade or business or rental property are deducted against that activity under section 164 and are not caught by the individual state and local tax cap. Taxes on property held for personal use are a different question.
Frequently asked questions
Who determines the assessed value of a commercial property?
The county or municipal assessor, on a cycle set by local law, using one or more of the income capitalization, sales comparison and cost approaches. They are not appraising it for you or for your lender, and the figure they publish is frequently a set percentage of estimated market value rather than market value itself. That percentage, the assessment ratio, varies by state and sometimes by property class within a state.
Is assessed value the same as market value?
Usually not. Many jurisdictions assess at a fraction of estimated market value, so a $5,000,000 building can carry an assessed value well below that and still be correctly assessed. Assessments also lag the market, because they are set on a cycle rather than continuously. Neither figure is your tax basis, which starts at what you actually paid.
Does the assessed value set my depreciation?
Not directly, but the assessor’s split between land and improvements usually does. Regulation section 1.167(a)-5 limits depreciable basis to the proportion the depreciable property bears to the whole, and Publication 527 permits using assessed values for that allocation “if you aren’t certain of the FMVs.” Most returns take that route by default. On a $3,000,000 building, the difference between a 70% and an 80% improvement allocation is about $7,692 of depreciation every year.
Can I use a different land and building allocation than the assessor’s?
Yes, provided you can support it. The regulation asks for the relative values of the depreciable and nondepreciable property at acquisition; it does not require the assessor’s opinion of them. An appraisal prepared for the purpose, or a cost segregation study, is stronger evidence than a mass-appraisal figure produced for property tax administration. What does not work is choosing a favorable ratio with nothing behind it.
Should I appeal my commercial property assessment?
Often yes, and it is worth deciding what you are appealing first. Reducing the total assessed value lowers the tax bill with no federal cost. Reducing the improvements value, which is the usual argument, shifts the ratio toward land and permanently reduces the share of your purchase price that is depreciable. Reducing the land value helps on both. Have that conversation before the appeal is drafted, not after it succeeds.
How is mixed-use property assessed?
In parts. The commercial and residential portions are typically classified separately and can carry different rates in the same building, allocated by floor area, income or another local convention. The allocation is a judgment rather than a measurement, which makes it one of the more productive places to look when a mixed-use assessment seems high. It also matters federally, because residential rental property depreciates over 27.5 years and nonresidential over 39.
Does a reassessment change my tax basis?
No. Basis starts at your cost and moves for capital improvements, depreciation allowed or allowable, and specific statutory adjustments. An assessor revaluing the property changes the property tax bill and nothing on your depreciation schedule. The exception people are thinking of is a step-up at death, which is a Code provision and has nothing to do with the assessor.
Are commercial property taxes deductible?
Real property taxes on property held in a trade or business or for the production of rents are deducted against that activity under section 164 and are not subject to the individual cap on state and local taxes. They are an operating expense of the property rather than an itemized deduction. Taxes on property held for personal use follow the individual rules, and property purchased mid-year is apportioned between buyer and seller at closing.
Related reading
- Cost segregation: what it costs and when it is worth it. The study that fixes the allocation.
- How to calculate depreciation. Recovery periods, methods and conventions.
- Repairs or improvements. Why the federal test ignores the assessor.
- Cost segregation and bonus depreciation. How the two work together.
- Cost segregation on new construction. A different starting point.
- Depreciation recapture. What the deduction costs on sale.
- 1031 exchanges. Deferring the bill instead.
- When depreciation stops. The end of the schedule.
- Deductions for real estate investors. The 2026 list.
- Real estate tax services. What we do and what it costs.
Schedule a call
A short conversation about your situation, our read on it, and whether it is a mutual fit. If you have bought a commercial property recently, we can look at how the land and building were split on your return and tell you whether it is worth revisiting.
General information, not advice for your situation. Assessment practice, ratios and appeal deadlines are set locally and vary considerably. Figures are illustrative. Sources: Regulation section 1.167(a)-5, IRS Publication 527, IRS Publication 946 and IRC section 164.
