When it comes to investments, looking at long-term strategies is undoubtedly one of the smartest ways to shape your future. And when it comes to purchasing land, you’ll find that this type of investment you make for you and your family is truly worthwhile.
What many prospective land owners may not realize, is that purchasing land may make you eligible for tax deductions depending on its property and its use. Whether you’re ready to buy or are making an investment, knowing the tax benefits of your property purchase can help you make a more informed decision.
Investors and Their Deductions on Land Purchases
One of the most important distinctions between owning investment property is that an owner can deduct greater expenses on taxes than on their own residence. Expenses used to generate taxable income from rental property can be deducted against rental income, and investment opportunities like this creates an enormous tax benefit.
From property tax, mortgage interest, property insurance, property management fees, and expenses associated with repairs and maintenance, all these are expenses that qualify for deductions. Let’s take a look at how.
In the same way a homebuyer takes out a loan to purchase a home, an investor may borrow money to finance a land purchase. As an investor, if your plan is to purchase land but not build right away, you’re eligible to claim the interest. Keep in mind, however, limits exist on how much investment interest to claim each year.
Property Tax Deductions
A landowner may also claim property taxes on vacant land. In this type of deduction, there are no limits that apply, and a property owner is able to claim the full amount. It’s important for owners of vacant land to ensure their loan is secured prior to tax filing so that collateral will be applied to their future home.
Rental Property Deductions
Another attractive tax benefit to land purchase is an owner’s ability to take deductions in the event they rent out their property. Depreciation deductions may be applied to the investment property when used as a rental property (e.g. apartment-style homes or for commercial businesses). To clarify, depreciation offsets the “wear and tear” of the property within a determined amount of time.
Deductions and the Difference for Real Estate Dealers
Buyers who purchase a lot or tract of land with the intention of reselling for profit may also qualify for deductions. These types of buyers will also be entitled to the same kinds of deductions that would apply to an investor.
These include both interest and tax deductions. In these instances, the only non-applicable benefits would be depreciation fees. In addition, real estate profits are taxed at regular income rates rather than as a capital gain.
Investment Land Expense Deductions
As we touched on previously, nearly any amount spent in connection with owning and maintaining a land investment can be deducted. These include repair and maintenance costs on existing structures or for the clearance and maintenance fees for raw land.
Furthermore, legal fees for drafting rental agreements and fees paid to professionals including accountants and bookkeepers can be deducted. The costs of traveling to your land or buildings to inspect them may also be used as a deduction.
Mortgage Interest Deductions
When a loan is used to purchase a property, the mortgage interest and mortgage insurance premiums paid may be used as a deduction. In order to claim these deductions, a property owner must have paid the payments and premiums to get the deductions.
If you own the investment land individually, deduct the payments on Schedule E. If your C corporation purchased the land, the interest and premiums paid are reported on Form 1120. An S corporation reports the payments on Form 1120S.
Investing in Land is a Smart Move That Benefits Your Future
While the land owner will be responsible for the taxes associated with the purchase, the long term benefit comes from its appreciation in value over time, and its income-earning potential should you rent it out down the road.
If you’re considering investing in land, there are great benefits for eligible land purchasers in the form of tax deductions.