For starters, real estate and the living structures you may build on real estate is *never* a deduction. Rental property is depreciated over 27.5 years, and you can only depreciate the value of the structure. With rental property, under no circumstances is land depreciated.
"Does a new building qualify as "land improvement" for the purpose of this qualification?"
Never. It's a property improvement. A land improvement (which would not be depreciated) would be something like spending $5000 to re-sod the entire lot. It adds to the value of the land which adds to the total cost basis of the entire property. But that land improvement is not a depreciable asset, ever.
How you deal with this on the SCH E depends on a few factors.
- Is the building on a separate lot that is billed for property taxes separate from the lot your primary residence is on?
- Does that building have it's own separately metered utilities? (Electric, gas, water, etc.)
I already know the answers to additional questions, based on your reference to it as a physically separate structure detached from your main, primary residence.
