When you sell improved real estate (e.g. a building and the underlying land), you need to allocate the selling price to the improvements (e.g. building) and the land. This is necessary to determine how much of the gain was for the sale of the improvements and how much was for the sale of the land.
Why? Because the gain on sale of depreciable improvements is calculated and taxed differently than the gain on sale of non-depreciable land.
Example: I sold a rental property for $50,000 more than what I paid for it. The value of the building did not change while I owned the property (older house, no improvements made), but the value of the land went up significantly (very desirable location). For that reason, I attributed most of the $50,000 increase in selling price to the land. My gain on the sale of the land was taxed at a favorable LT capital gain rate; I ended up with a small gain on the sale of the house, which was taxed at a higher, ordinary income rate (due to depreciation recapture).
(Of course, the opposite could have applied, i.e. little change in the value of the land and a big increase in the value of the improvements).
