Agricultural & Vacant Land Tax Benefits
Agricultural and Vacant Land Tax Benefits
Purchasing land is a popular real estate investment, but the tax implications vary based on the type of land you purchase and where you make the purchase. Agricultural land and vacant land have unique tax benefits compared to residential and commercial properties.
Agricultural Land Tax Benefits
Agricultural land is land used for farming, ranching, or timber production. Investing in agricultural land can provide various tax benefits.
1. Reduced property taxes: Agricultural land is often valued at a lower rate for property tax purposes than residential and commercial properties. In some states, agricultural land is eligible for a lower tax assessment ratio or special tax exemptions, resulting in lower property taxes.
2. Deductions for expenses: As a landlord, you may have the ability to deduct expenses related to owning and operating the agricultural land. FarmLoans.com suggests that seed, feed costs, fuel, and capital improvements are all items that can be considered deductions.
3. Depreciation: The IRS allows for the depreciation of the agricultural land, which can be used to offset rental income or capital gains when the property is sold. Midwest Land Management suggests that some other items that would depreciate include equipment, grain storage, barns, other outbuilding, and even some crops! Depreciation allows you to recover the cost of the property over time as it loses value due to wear and tear.
4. Conservation easements: Landowners who place conservation easements on their agricultural land may be eligible for federal tax deductions. Trust&Will explains that a conservation easement is a legal agreement between the landowner and a conservation organization, which restricts certain uses of the land to protect its natural resources and ecological value. By doing so, the landowner may receive a tax deduction on the value of the land subject to the easement.
Vacant Land Tax Benefits
Vacant land, on the other hand, is land that has no buildings or structures on it. The tax benefits of owning vacant land are different from those of agricultural land. Here are some tax benefits of owning vacant land:
1. Deductible property taxes and interest: Like agricultural land, vacant land is often valued at a lower rate for property tax purposes than residential and commercial properties. This results in lower property taxes and the interest is also a deduction. LandsandLots.com estimates that this tax benefit rate can be as high as 39.6% when itemized on the personal income tax Schedule A.
2. Deductible expenses: Although vacant land is fairly low maintenance, landowners may be able to deduct expenses related to owning vacant land. Santa Cruz Properties explains that deductible expenses can include items like clean up services, landscaping, construction expenses, advertising, and other general operating expenses.
3. Depreciation: Unlike agricultural land, vacant land does not depreciate and cannot be used to offset rental income or capital gains. However, if you decide to build a structure on the land in the future, the cost of the land can be added to the basis of the structure, which can reduce capital gains when the property is sold.
4. Conservation easements: Trust&Will explain that similar to agricultural land, vacant landowners who place conservation easements on their property may be eligible for significant federal tax deductions. This method of investing can be especially beneficial for estate planning purposes.
Consider Location
When it comes to determining the tax benefits of owning land, the location of the land is a crucial factor. Rural areas often offer more tax incentives for agricultural land, while vacant land in urban or suburban areas may have potential for development, resulting in higher property values and increased tax implications. BiggerPockets suggests that the big risks of purchasing vacant land (especially in urban and suburban areas) is the potential for underground complications with sewage lines, utilities, soil reports, and the possibility of future issues dividing up land parcels due to existing easements.
Purchasing agricultural or vacant land as a real estate investment can provide various tax benefits, including reduced property taxes, deductible expenses, depreciation, and conservation easements. It is important to consult with a real estate professional, tax professional, and the local planning department to understand the specific tax implications of owning land, history of the specific plot of land, limitations to the specific plot of land, and how those items can affect your investment goals.