Revenue ruling · 1965
Rev. Rul. 65-265 (Land Clearing & Grading)
1965-2 C.B. 52
IRS revenue ruling
The facts
Long-standing IRS revenue ruling on land preparation costs. It separates general clearing and grading of raw land from excavation and grading performed for specific depreciable construction.
What it holds
Costs of general grading and clearing of land are capital expenditures that become part of the non-depreciable cost basis of the land. Costs of excavation, grading, and removing soil necessary for the proper setting of buildings and paving of roadways are part of the cost of those depreciable assets and are included in their depreciable base. Clarified by Rev. Rul. 68-193.
Why it matters for your study: Site work dollars must be split. Some go to land and can never be deducted. Some go with the building or the paving and can be depreciated. This ruling is the rule behind that split, and the split is a common exam point.
Background
When raw land gets developed, a lot of money goes into the dirt before anything goes up: clearing, rough grading, cutting and filling, fine grading for foundations and roads. The tax question is which of those dollars are land cost, gone into basis forever, and which attach to something that depreciates.
The IRS answered in 1965 with this ruling. There is no standalone irs.gov PDF for guidance that old, but the IRS still quotes and applies it in primary documents, including Rev. Rul. 2001-60 and TAM 200043015, which is how the rule was verified here.
What it established
The ruling draws one line with two sides. General grading and clearing of land are capital expenditures added to the land's cost basis. The land is not depreciable, so those costs produce no deductions.
But excavation, grading, and removal of soil necessary for the proper setting of a building, or for the paving of roadways, are part of the cost of those assets. They go into the depreciable base of the building or the paving and recover over those assets' lives. Rev. Rul. 68-193 later clarified the ruling, and the framework has held for sixty years.
How it shows up in a study
Every ground-up project and many acquisitions include site work, and a study has to allocate it. This ruling is the Appendix A authority for that allocation. Rough clearing and general grading of the parcel go to land. Excavation for the foundation goes with the building. Grading performed so the parking lot can be paved goes with the 15-year paving.
The practical discipline is tracing each site work invoice to its purpose. Contractor pay applications and civil drawings usually show which earthwork served which improvement. That paper trail is what supports the split when an examiner tests it.
What it does not mean
This ruling does not make all site work depreciable. The default for general land preparation is land basis, with no deduction ever. The depreciable side is limited to work necessary for the proper setting of specific depreciable assets, and that tie has to be real and documented.
It also is not a license to push general grading into the 15-year land improvement bucket. Grading earns a depreciable life only by attaching to a depreciable asset, like a building or paving. Calling parcel-wide earthwork a land improvement reverses what the ruling actually says.
Primary source
Read the official text for yourself, or share it with your advisor.
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This page explains a tax authority in plain words. It is not tax advice for your situation. The way this authority applies to your property is reviewed by a licensed tax professional. Citation is provided so you or your advisor can read the primary source.