If you Invest in Raw Land....You need to read this blog

There are endless ways to invest in real estate; and there are two main reasons people buy land.

• 1.To develop the land and re-sell
• 2.To hold long hope in anticipation of it increasing in value

If you Buy land for option 1 this blog isn’t for you. But if you buy land to hold long term for appreciation….you’re going to want to keep reading.

The TCJA (Tax Cuts and Jobs Act) put a few major changes in place that will directly impact the what and how when it comes to deductions related to your land investments.

I’ve always been able to deduct expenses related to my land, can I now?

The answer is….it depends.

Prior to 2018 we had a category of deductions known as miscellaneous itemized deductions. I won’t go into too much detail on them, because from 2018-2025 they no longer exist. Long story short, a lot of random deductions used to be captured under this bucket- including your land investment related expenses.

Now for your land investments we have two options:

1.Deduct the Taxes and Interest as Investment Expense under Itemized deductions

2.Capitalize the Expenses and add them to your Basis (cost) of the land

Your first thoughts should be…..

What about the rest of my expenses? Lawn moving, insurance, general administrative?

…Ya, they’re gone. You can’t deduct those any more.

What if I don’t itemize on Schedule A on my tax return? I take the standard deduction?

…Well, then you only have one option. Capitalize the taxes and interest and add it to the basis of your land.

Unfortunately- It’s kind of a Raw (get it? It’s a land joke) deal.

There are a few more things to consider….

 

   ~ Investment expenses are only deductible to the extent            of investment income 

• ~ Any investment expenses not able to be deducted in a year will carry forward to the next

• ~ Deducting real estate taxes on your land as investment expense will NOT count toward your $10,000 SALT limit per tax code section 212.
  
  

• 

• So what should I be considering in terms of Tax Strategy?

  • Choosing whether to deduct your Land’s Interest and Real estate taxes or capitalize them is a choice you make annually via an election on your tax return.

  One year you can expense.

  The next you can capitalize.

  • You can choose to expense or capitalize either or- meaning you can expense taxes, deduct interest.
  • You can be strategic about how much you expense since it will be limited to your investment income.
  • If you Use schedule A to itemize on your taxes- you will almost always want to choose to report the Interest and Taxes and a Sch A investment expense

  Even if you don’t have investment income to use the expenses against- if you itemize you will want to choose that option.

  Why should I choose to list them as investment expense if I can’t actually deduct them this year?

  As mentioned earlier this un-used deduction will flow forward and be available in future years. In the year you’re able to utilize it it will reduce your ordinary income tax.

  If you capitalize these expenses they will instead reduce your capital gain when you sell.

  And capital gain tax rates < ordinary income tax rates.

  Being able to use that deduction against income that is taxed at a higher rate will always give you greater tax savings.

  In Summary- Make sure if you have land holdings that you discuss the options with your tax professional to ensure that you are being strategic about where and how you take your related deductions.