Real estate is a great investment. Given enough time, it’s guaranteed to appreciate in value and if you’re lucky, a real estate developer will come along and offer big bucks for the property. One negative about owning property is that you’ll be required to pay taxes for the privilege. If you take out a loan for the purchase, you’ll also need to pay interest to the lender. You probably already claim that interest on your primary home and, if you own one, a secondary home. However, claiming property without a house on it on your taxes is a bit more complicated.
Land as an Investment
Just as many homebuyers take out a loan to buy a home, investors also borrow money to finance a land purchase. If you take out a loan for a piece of land you plan to sit on for years, you can claim the interest. But you’ll need to itemize in order to take that deduction and there are limits on how much investment interest you can claim each year.
In addition to claiming interest, you can also claim property taxes for your vacant land. This deduction is free and clear of the limits that apply to interest deductions, so you’ll be able to claim the full amount.
Land on Hold
Say you stumbled upon the perfect property and got a great deal. You made the purchase with the full intention of putting a home on it someday. Life can get in the way, though, even if you had every intention of tracking down a builder and getting started immediately. You may even plan to wait until you’ve saved enough for a good down payment on the construction portion of your future home sweet home.
Unfortunately, as far as the IRS is concerned, land does not a home make. Your property must meet the requirements for what the federal government defines as a “qualified home.” This means it should have sleeping, cooking and toilet facilities. Camping out on your land doesn’t count. In short, until you’re ready to start construction, you’ll need to leave the interest and property taxes you’re paying off your tax forms.
If you’re in the process of building a home on your land, you may be in luck. To qualify to claim your interest on the land you own, your loan must be secured. That means when the bank issued the property loan to you, your home was used as collateral for the money you borrowed.
Before filing your taxes, take a look at your loan paperwork and make sure you have a secured loan. If you have questions, your lender likely will be able to answer. If, at any point, your loan changes and is no longer secured by the home you planned to build on it, it will no longer be claimable on your taxes.
Just when you thought you had it all figured out, though, the Tax Cuts and Jobs Act came in and changed things. You’ll still be able to claim your property taxes and interest, but there are now limits. Taxpayers cannot claim more than $10,000 ($5,000 for those filing separately) for state and local income taxes and state and local property taxes combined. If your property and income taxes are high, this could negate any benefits you’d see.
The new law also affects the interest you can claim. You’ll now only be able to claim the interest you pay on up to $750,000 of new mortgage debt if you’re filing jointly. Separate taxpayers can claim up to $350,000. However, since the standard deduction has increased with the law, many property owners will find that the interest they paid doesn’t help at all.
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