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Real estate

Real estate accounting starts at acquisition: how a purchase price is split among land, building, improvements and leases determines decades of depreciation, rental income and gain on sale. Book and tax diverge from the first day and stay apart for the life of the property.

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  • 4 book rules
  • 5 tax rules
  • 6 forms identified
  • Stated as at November 2026
Two sets of rules

How the books treat it, and how the return treats it.

Books Book accounting · US GAAP

  • Asset acquisition or business combination

    If substantially all of the fair value acquired sits in a single asset or group of similar assets, the purchase is an asset acquisition: costs are capitalized and allocated on relative fair value, including to in-place and above- or below-market leases.

    ASC 805-10-55-5A; ASC 805-50

  • Lessor accounting

    Rental income under operating leases is generally recognized on a straight-line basis over the lease term, including free-rent periods and scheduled escalations.

    ASC 842-30

  • Development and carrying costs

    Project costs, and interest during active development, are capitalized to the property rather than expensed.

    ASC 970-340; ASC 835-20

  • Impairment

    Property held and used is tested for recoverability when events indicate its carrying amount may not be recovered.

    ASC 360-10-35

Tax Tax accounting · Internal Revenue Code

  • Recovery periods

    Residential rental property is recovered over 27.5 years and nonresidential real property over 39, straight-line and mid-month. Land is not depreciable.

    IRC §168(c); IRS Publication 946

  • Cost segregation

    Land improvements (15-year) and personal property (5- and 7-year) may be identified separately from the building and may qualify for bonus depreciation. Identification is typically supported by an engineering-based study.

    IRC §168(k); Rev. Proc. 87-56

  • Business interest limitation

    Business interest expense is generally limited to 30% of adjusted taxable income. A real property trade or business may elect out of the limitation, in which case certain property must use the alternative depreciation system.

    IRC §163(j)(7)(B), §168(g)(1)(F)

  • Like-kind exchanges

    Gain on real property held for business or investment may be deferred in a qualifying exchange, subject to identification and completion periods.

    IRC §1031

  • Personal holding company tax

    A closely held corporation whose income is mostly rents, interest and dividends may owe an additional tax on undistributed personal holding company income.

    IRC §§541–547; Schedule PH (Form 1120)

The differences between the two are Schedule M-1 adjustments.

And they are where examinations tend to look first.

In development
Specialist knowledge

What the agents load for this industry

Each industry has a knowledge pack that sits in the stable, cached part of every prompt, so most of its cost is incurred once per return rather than on every round. Knowledge packs are in development.

  • Lease abstraction: terms, escalations, free rent, tenant improvements
  • Purchase-price allocation among land, building, improvements and intangibles
  • Asset classes and recovery periods (Rev. Proc. 87-56)
  • Exchange timelines and qualified intermediary documentation
  • Recapture on disposal (§1250)
Forms commonly involved
  • Form 1120
  • Form 4562
  • Form 4797
  • Form 8824
  • Schedule PH
  • Form 8990
Examiner agent

Questions it raises first

  • How was the purchase price allocated to land?
  • Is this expenditure a repair or an improvement?
  • Was the real-property election made, and is ADS applied?
Valuation

Income capitalization and comparable sales; purchase-price allocation for acquired properties.

Stated as at November 2026 for general information only; not tax, legal or accounting advice. Rules change and their application depends on facts. NGTAX.AI currently prepares Form 1120 only; other forms listed are identified for the reviewing professional and may not yet be prepared by NGTAX.AI. See the disclaimer.

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