Buying land as a long term investment can prove to be beneficial for tax declaration. We listed a few ideas below.
Taxes on vacant land for personal purposes
Real estate taxes on the vacant lot can be deductible as personal itemized deductions. As Nolo.com explains, if an investor holds the raw land for personal use, the property taxes paid on vacant land can also be deducted as a personal itemized deduction on Schedule A by an investor. To be eligible for this deduction, however, the land must be utilized solely for personal purposes. For vacant land (Tax Code Section 212 investment), the property taxes on such an investment are exempt from the $10,000 limit.
Alternatively, if chosen, taxes can be capitalized and added to the cost basis of the vacant land. See capital gains.
Interest paid for undeveloped land
Interest paid on the vacant lot and is either deductible as investment interest, or capitalized and added to your cost basis of the vacant lot.
1) Deductible investment interest
According to Nolo.com, any interest paid by an investor on money borrowed to buy vacant land is investment interest, which can be claimed as a personal itemized deduction. Any excess funds are carried over to future years. The annual investment interest deduction is limited to the investor's net investment income for the year.
2) Capital Gains
As per strategy described by BlandGarvey.com, capital gains tax is usually paid once the property is sold in the future. The tax gain on the sale can be minimized by capitalizing certain property-related expenses such as loan interest, real estate property taxes, and carrying charges, such as mowing, HOA fees, upkeep cost of maintenance, and so on. This is a yearly activity if an investor decides to add the costs to the base of your unimproved real estate. These expenses in this case become the property's cost basis, thus increasing the property's cost basis and lowering the gain when it is sold later (IRC Sec 266 election). In addition, you can choose to capitalize any or all of the mentioned categories – interest, taxes or other carrying charges on a year-by-year basis.
Depreciation of land improvements
Raw land cannot be depreciated as it has no structures on it. Nevertheless, certain land improvements can be depreciated.
As AccountingTools.com explains, land improvements are additions to a parcel that make it more usable, such as drainage and irrigation systems, fencing, landscaping, parking lots and walkways. Thus, the depreciation deduction is applied for improvements you make to the land but under the condition that it is possible to estimate a useful life of these improvements. Otherwise do not depreciate the cost of the improvements.
According to WikiAccounting.com, if land is being prepared for its intended purpose, then the inclusion of cost into the land asset is the right choice. This will not be depreciated. Examples of such costs are demolishing an existing building, clearing and leveling the land.
Exemptions
In some states one can benefit from tax reductions that are applied for seniors, people with disabilities, veterans and some other cases such as homestead exemption or agriculture properties.
