Previous Realized blogs have dealt with the issue of real estate investments, taxes, and deductions. Specifically, if you own income-producing real estate property as an investment, you also have the ability to take various deductions and expenses on that property when it comes to tax-filing time.
But this is the case when it comes to income-producing property. What happens when you are dealing with vacant land? Technically, raw land does not generate any income, but it does create plenty of expenses. This includes property taxes. So, are property taxes on vacant land tax deductible?
As with many issues pertaining to taxes, the answer is yes, but. A great deal depends on your role as owner of that raw land. Furthermore, such deductions might have to follow the regulations that were set forth in the Tax Cuts and Jobs Act of 2017.
Dealer or Investor?
If you own land, you likely fit into one of two categories. You are either a real estate dealer or a real estate investor.
If you are a dealer, buying and selling land is your core business. You acquire large chunks of land, and spend a great deal of time in finding buyers, negotiating property sales, or improving land. A good example of this would be someone who buys land, subdivides it then sells it to other individuals. Your goal here is to earn a profit by using raw land as inventory.
If you are a real estate dealer, expenses generated from owning the land (including property taxes) are considered the cost of doing business. This means that you are entitled to deductions that are part of being a business owner. From a tax-filing standpoint, this means that your expenses would be deducted on the IRS Schedule C (as a sole proprietor).
However, if you are an investor, your land-owning goal is quite different. You are hanging on to that property in hopes that it appreciates in value over time. But during your hold, you still have expenses. There are still property taxes and maintenance costs. And, because you are not engaged in a business, you’re not entitled to take those costs as business deductions.
But if you itemize, you could be in luck. Specifically, those expenses can be considered personal itemized deductions on the IRS Schedule A.
If you fall into the investor category, it’s important to keep in mind that there is also a difference between “vacant” land and “improved” land. These designations can have a bearing on deductions and how you are taxed.
The Tax Cuts Act
However, before diving in and putting all those expenses on either your Schedule A or Schedule C, keep in mind that the Tax Cuts and Jobs Act has another requirement. Specifically, you’re still allowed to itemize, but the itemization is capped at $10,000 (or $5,000 if you are married and filing separately). This could be an issue if your land is in a high-property-tax state. While there are exceptions to this, it’s a good idea to keep this in mind when considering taxes.
Get Advice
As is the case with any type of investment, it is essential that you obtain guidance from your tax expert when it comes to proper reporting and filing. This is especially true when it comes to understanding property taxes and vacant land. It is likely you could deduct those taxes on the land. But to ensure you aren’t surprised by a tax bill, follow the advice of your accountant or CPA.
