The Internal Revenue Service lets you subtract all your expenses from the gross income you earn on your investment property to find your taxable profit or your loss. With investment land, it's very common to experience a loss, since you have incur expenses in carrying it but you may not be earning any income. There are three potential ways that you can claim that loss to reduce your taxes either now or in the future.
Investment or Farm
Before determining how to use your loss, it's important to determine whether your investment land is land or farmland. If you don't use it for farming or if you rent it to a farmer at a flat rate that is not tied to its production, it's considered investment property. It's also investment property if you rent it to a farmer on a crop or livestock sharing arrangement where your payments vary based on production but you don't get involved in any of the work or decisions in actually farming the land.
Offsetting Other Properties
The easiest way to use a loss on your investment land is to offset gains on other investment properties. If you lost $10,000 on a piece of investment land but you made an $80,000 profit on an apartment building, you would show the $80,000 profit on line 24 of your Schedule E and the loss on line 25. You then combine them together to show an overall $70,000 profit on line 26, which you carry over to your 1040 tax return.
Passive Activity Losses
When you have a loss on your Schedule E, you may still be able to use it to reduce your taxes. The IRS allows you to use up to $25,000 of passive activity losses, like your loss on your investment land, to offset other income. The drawback to this provision is that you can only claim the full offset if your adjusted gross income is $100,000 or less. The offset phases out at a rate of $1 for every $2 in income above this level and is completely gone for incomes over $150,000.
You have one more way to claim your investment property losses if you can't use the other methods. The IRS will let you carry them forward to use against future passive profits, such as if you begin renting out your land or if you buy another piece of investment property that is profitable. You can also use them in years when your AGI drops below the $100,000 to $150,000 threshold. Unlike some other carryforward provisions in the tax code, you can continue carrying passive real estate losses forward into the future until you use them up.
Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.