Purchasing land is a worthy investment that can have benefits that last a lifetime. The longer you own property, the more your land will appreciate.
But that’s not the only way you’ll benefit!
Landowners may be eligible for tax deductions depending on the property and its use.
Deductions for Land Investors
Investors are buyers who purchase land with hopes that it will incur appreciation and increase in value. Deductions are available, depending on whether it is raw land or property which you will be renting out for income.
Just like someone who would take out a loan to finance a home, investors may borrow money to purchase their land. Interest will accumulate according to the number of years you possess and pay for the property.
You can be eligible for deductions on interest when filing taxes as an itemized personal deduction. An annual deduction or ‘net investment income’ is limited to the difference between the yearly cost of property tax expenses and investment expenses (excluding interest expenses).
If you own the investment land individually, you may also seek to recover interest deductions on IRS Schedule E.
Property Tax Deduction
Those who have purchased a plot with the intention of building a home but have not yet gotten around to it may not be able to claim interest and property taxes unless they have a loan secured for the pre-construction process.
Owners of vacant land should make sure that their loan is secured prior to filing their taxes to see that collateral has been put into their future home. If the loan for building a home is somehow revoked, then vacant landowners may not claim property taxes.
Tax deductions for ‘raw land’ should be filed as a personal itemized deduction under Schedule A for those that have a secured loan in place.
Rental Property Deductions
Owners of property may take deductions if they are renting out the property by filing under IRS Schedule E and in conjunction with their corporate tax return.
Depreciation deductions may be made if you rent your investment property for buildings such as apartment-style homes or even commercial businesses. Such deductions are made for ‘wear and tear’ by the renter.
These deductions may also be made for improvements on properties which are being prepped for commercial use, such as building streets on the land for businesses to use.
How Are Deductions Different for Real Estate Dealers?
Individuals who are purchasing land for the intention of re-selling at a higher value are also eligible for deductions. They are entitled to the same deductions that an investor would be, including both interest and taxes deductions. As sole proprietors, they would file under IRS Schedule C. The only thing they are not eligible for is depreciation fees.
Furthermore, real estate profits from deals are taxed at regular income rates and not as a capital gain.
Investing in Land Is Valuable and Worthwhile
Even though you will be responsible for taxes when you purchase land, it is a worthwhile investment because that land can appreciate in value over time or you can even generate income through renting out the land.
If you are interested in investing in properties, know that all types of land purchasers are eligible for some type of deduction on tax and interest.