How Do Property Taxes Apply to Vacant Land Investments?

Vacant land is still a taxable investment.

Jupiterimages/ Images

An empty lot can be a profitable investment, but it's also a taxable one. Local governments levy property tax on empty lots just as they do homes and shopping malls. The rule of thumb is that assessors tax empty lots at their "highest and best use," even if you're not sure how the lot will be used.

Highest and Best Use

When the tax assessor looks at your investment land, she doesn't see an empty space. Instead, she sees its potential -- the highest and best use you can make of the property. If your land sits in the middle of residential zoning, it's simple: You have to build houses. If it's in a commercial district or in an unzoned area, you may have more flexibility. In that case, the assessor has to decide what would be the most profitable use and tax your land accordingly.

Most Profitable

Assessing property is supposed to be as objective as possible. In deciding what's highest and best, the assessor rules out any use that isn't physically or legally possible. He then eliminates uses that aren't financially feasible. Among any remaining possible uses, he considers the one that can bring you the biggest return on your investment. Say you can build either an apartment complex or a strip mall. If the apartment complex is more profitable, the assessor will value the land as multi-family residential.

State Specifics

Your state may have specific laws that affect the standard assessing procedure. Minnesota, for example, found that in rural areas, there were too many potential uses for vacant land to assess it fairly. The solution was to create a new land category, "2B Vacant Rural Land," and use that for assessment, rather than second-guess its future use. In Kansas, some owners have been able to claim vacant land as agricultural property -- one of the lower-tax uses -- by having mowers bale the grass after mowing it.

Deducting Tax

If you're a full-time real estate professional, you can write off all your real-estate expenses, including property tax. Investing as a part-time gig gives you a much more limited write-off. You have to deduct investment expenses as a 2 percent itemized deduction on Schedule A. Add your expenses and other 2 percent write-offs -- unreimbursed employee expenses, for instance -- then subtract 2 percent of your adjusted gross income. Whatever remains is deductible.