Tax Deductions for Land Held for Investment

Tax deductions help offset the costs of owning and maintaining investment land.

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When you purchase investment land, you can profit from the income the property generates or by the land’s appreciation in value. You can take tax deductions for your investment land as long as you do not use the land for personal use. The number of deductions you can take depends on whether you own raw land or income-producing land. If you own the land as an individual, you take the deductions for rental property on Schedule E and file it along with your personal tax return. If you own raw land, you take the deductions on Schedule A. If your corporation owns the land, you take the deductions on your corporate tax return.

Mortgage Interest Deduction

If you took out a loan to purchase the property, you can deduct the mortgage interest and mortgage insurance premiums you paid. You must have actually paid the mortgage payments and insurance premiums to get the deduction. If you own the investment land individually, you deduct the payments on Schedule E. If your C corporation purchased the land, the interest and premiums you paid are reported on Form 1120. An S corporation reports the payments on Form 1120S.

Property Tax Deduction

You can deduct the state and local property taxes you paid for your investment land. If your land is located in a state or county that imposes property improvements taxes for such things as roads, sewer lines or sidewalks, you can’t deduct those amounts. The amount you can deduct for your property taxes may be limited if you are in a high tax bracket and qualify for the Alternative Minimum Tax.

Depreciation Deduction

You can take a depreciation deduction for the wear and tear on your investment property including apartment buildings, single-family homes, commercial buildings and factories. You must depreciate the property using the IRS-specified Modified Accelerated Cost Recovery System method. If you own raw land, you can’t depreciate the property. The IRS classifies land as a permanent asset that does not decay, wear out or become obsolete. You can take a depreciation deduction for improvements you make to the land, such as preparing the land for business use by installing roads.

Investment Land Expense Deductions

You can deduct almost any amount you spend in connection with owning and maintaining your investment land. Repair and maintenance costs for existing structures, or clearing and maintenance fees for raw land are deductible. Legal fees for drafting rental agreements and fees paid to professionals such as accountants or bookkeepers are deductible. You can also deduct the costs of traveling to your land or buildings to inspect them if you live out of the area.