Land value versus building value is one of the most useful ideas in real estate, and one of the least explained. When you invest in a property you own two things that behave very differently: the land, and the building on it. Once you see them separately, a lot of decisions become clearer.
Real estate, which is land, is what we invest in. The building is the structure on it, and the building produces the rent that makes holding the land possible. Hold the land alone and you are land banking, which suits someone with money to spare and no need for income.
The building wears out
A building ages from the day it is finished. Roofs, kitchens, carpets and hot water systems wear out and need replacing. The tax system recognises this. For a home whose construction began after 15 September 1987, an investor can usually claim the cost of the building over forty years, at 2.5 per cent a year. Fittings such as appliances and carpets are claimed over their own shorter lives.
There is a catch on established homes. If someone has already lived in or let the home, an investor who bought it after 9 May 2017 generally cannot claim the fittings that came with it. A quantity surveyor’s depreciation schedule sets out what can be claimed, year by year.
The land does not wear out
Land does not need a new roof, and it does not date. You cannot claim it against your tax, either. What it offers is position: how close it is to work, schools, transport, water and the things people want to be near. Most of the rise in a property’s value comes from the land, not the building. I’ve yet to see a building that grew.
The part that surprises people at the end
The deductions for the building lower the tax you pay each year. They also lower the property’s cost base. When you sell, the gain is measured from that lower base, so it is larger. You enjoyed the deductions along the way, and the tax system takes some of that back at the end. Since the 2026 changes, the way that gain is taxed is changing too, from 1 July 2027.
Land value versus building value: the balance in what you hold
Every property carries a different share of land and building. A house on its own block carries a large share of land. An apartment in a tall building carries very little, because the land is shared by many owners. A brand new home carries more building and more to claim; an older home on a good block carries more land and less building.
Neither mix is right for everyone. A new building’s deductions can help someone carry the costs while the land does its work; another investor wants more of what they hold sitting in the land. Now that the tax changes favour new builds, that trade-off weighs more heavily.
Questions before you commit
- How much of this price is land, and how much is building?
- How old is the building, and what will need replacing in the next ten years?
- What does the depreciation schedule show, and for how long?
- What is it about this land that people will want?
- Can you comfortably hold it for the years the land takes to do its work?
Knowing whether you are paying for the building or the land is where a sound decision starts.
Look at the land first, against your own numbers. To do that for a property you are weighing, book a first conversation. It costs nothing.
Nicholas Lockhart
Tax rules as at 10 October 2026. An accountant and a quantity surveyor can confirm what applies to a particular property.
Source: Income Tax Assessment Act 1997, Divisions 40 and 43.