With all of the discussion lately of the benefits of home ownership, it becomes easy to forget that these benefits apply, in one form or another, to just about any type of real estate ownership. This can include the ownership of raw land. Whether held for investment or residential purposes, a parcel of land comes with a number of tax deductions built-in.
1) Mortgage Interest
As long as your land is held as a primary residence, secondary residence or investment property, the mortgage interest that you pay on it is tax deductible. As of May 2013, if it is a residence, you will itemize the deduction on your Schedule A, as long as the total value of your first and second homes is $1,000,000 or less if you are married or $500,000 are single. If you hold the land as an investment, you can report its interest as an expense on your Schedule E.
2) Property Tax
Property tax is treated similarly to mortgage interest. For land held as a personal residence, you can deduct it on your Schedule A. Your ability to deduct property tax, as well as other state and local taxes, can be limited, though, if you are subject to the Alternative Minimum Tax. Because the property taxes on land held as an investment are expendable on Schedule E, though, they are not subject to AMT limitations.
3) Miscellaneous Expenses
If you hold your land as an investment for which you file Schedule E, you can expense just about anything you spend in the process of owning it. Traveling to inspect the land would be an allowed expense, as would the cost of clearing or cleaning it, as well as maintaining any roads through it. You cannot take these expenses as deductions on your Schedule A for land held as a primary or secondary personal residence, though.
4) Depreciation and Land
Although investment property is depreciable, land held for investment purposes is not. The reason for this is that while buildings gradually decay, land is generally permanent. Barring some sort of large natural process like earthquake, flooding or large-scale erosion, most land was in existence hundreds of years ago and will be in existence hundreds of years from now. However, certain improvements that you make to your land, like roads or certain types of land preparation can be depreciated on Schedule E over the improvement’s individual useful life.
To learn more about all the tax benefits of owning land contact a 9 Core Realty representative at (239) 333-2221. Be sure to check back on this blog for more upcoming articles in our land taxation series! The next blog in this series will cover tax breaks for the development of raw land!