Tax rules require the purchase price of land to be allocated among the land and the various assets that are purchased with the land, such as fences, wells, roads, buildings, and timber. With the increases in the price of farmland and the cost of fertilizer, some buyers of farmland are allocating part of the purchase price of the land to fertilizer that was applied to the land before the purchase. Similarly, some taxpayers are allocating part of the date-of-death FMV of farmland to fertilizer that was applied to the land before the decedent’s death. That allocation allows them to deduct the cost of the fertilizer instead of including that portion of the purchase price or date-of-death basis in the nondepreciable basis of the land.
This article reviews the tax rules that require buyers and sellers to allocate the purchase price of a group of assets and applies those rules to fertilizer acquired with purchased or inherited farmland.