Many farmers forget to properly allocated their purchase price when purchasing land. For tax purposes, you can not deduct land, however, you can depreciate any improvements made to the land. For example, assume a farmer buyer a quarter section for $1 million dollars. On that quarter section, there is a well, roads, fences, buried main line, a small shed, and a grain bin.
The farmer is allowed to determine the fair market value of all of these items and allocate the purchase price accordingly. By making a proper allocation, the farmer may be able to turn non-deductible land into depreciable assets.
In a recent IRS Chief Counsel Advice opinion, a farmer got creative with this allocation and the IRS turned them down. The farmer had purchased a vineyard located in an area designated under the American Viticultural Area (AVA). This designation can have great value to a vineyard since certain AVA appear to have a greater value to the consumer. For example a Napa Valley AVA wine may be perceived to be more valuable that a wine from Central California, etc.
In my state of Washington, we have several AVA and for example, wines from the Walla Walla or Red Mountain AVA are perceived to be more valuable.
This farmer wanted to take advantage of the AVA and allocated part of the purchase price of the land to the perceived AVA value. The amount allocated to the AVA, if allowed, would be deductible on a straight-line basis over 15 years. Instead, the IRS said that this value could not be separated from the land and therefore is treated as part of the cost of the land and non-deductible.
This is the interpretation by the IRS for now, however, it would not surprise me to see this taken to court to determine if the IRS is correct. I can see a valid reason for determining that there is extra value associated with an AVA and we shall see how this turns out.
But for now, you can not amortize an value associated with an AVA
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