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Depreciation of real estate in Italy – separation of land value

by Dr Martin Lechner

For purposes of calculating the depreciation of business properties purchased by companies, Italian accounting standards and tax regulations clearly provide that the underlying value of the land must be separated from the value of the property. This approach is based on the fact that the underlying land has a different and independent economic operating lifetime.

Assuming that the underlying land potentially never loses its utility (except in particular cases that we will not go into here), depreciating the value of the land is not allowed. The depreciable value of the property must be taken net of the relative value of the underlying land. In order to determine the value of the land to be deducted, which will therefore not be depreciated, the tax legislation provides for different scenarios.

If the land is acquired jointly with the property, the cost of the land is measured as the higher between the value indicated in the balance sheet in the year of purchase (based on expert appraisals) and the amount corresponding to 20 percent (30 percent for industrial property) of the total cost of the property purchase. The separation of the value of the land, based on the aforementioned principles, must also be done in cases where a company purchases only a portion of a property (e.g. an office that occupies one floor of a property).

On the other hand, in the event of a previous purchase of the land and the subsequent construction of the property, the value attributable to the land is equal to the purchase price stated in the corresponding deed of purchase. The construction costs of the building will be fully depreciable, regardless of the percentages indicated above. In such circumstances, the value of the land can be easily obtained from the accounting. If only the “surface right” of a property is acquired for a limited time period, then no value needs to be allocated to the land and the full value of the surface right is depreciable.

Photo: Uwe Rieder

11 January 2023

Comploj Vieider Lorenzon Zanellato Lechner | PDC Partner