What Are the Tax Benefits of Land Ownership?

Buying land is a big move. It’s the kind of investment that can shape your financial future and get you a tangible piece of the American dream. While you might be focused on finding the perfect plot, it’s also smart to think about the financial perks that come with it. One of the most important advantages is the potential for tax benefits. These can make land ownership more affordable and help you maximize your return on investment.

So, you’re probably wondering what these tax breaks actually look like. They aren’t just for big-time real estate moguls. Everyday landowners can take advantage of them, too. This guide will walk you through the primary tax benefits of land ownership, explaining how they work in simple terms. We’ll cover everything from property tax deductions to special programs for conservation, giving you a clear picture of how owning land can positively impact your tax situation.

Deducting Your Property Taxes

This is one of the most direct and widely used tax benefits for landowners. The property taxes you pay to state and local governments are generally deductible on your federal income tax return. This means you can subtract the amount you paid in property taxes from your taxable income, which lowers your overall tax bill.

How It Works

Each year, your local government assesses the value of your land and sends you a property tax bill. Once you pay that bill, you can claim the amount as a deduction.

Now, the Tax Cuts and Jobs Act of 2017 (TCJA) placed a cap on the state and local tax (SALT) deduction. This cap limits the total amount you can deduct for all state and local taxes, including property, income, and sales taxes, to $10,000 per household per year ($5,000 if married and filing separately).

However, it’s important to note that this $10,000 cap is scheduled to expire at the end of 2025. Afterward and through 2029, the SALT deduction cap will jump to $40,000, offering even more savings for land owners.

Taking Advantage of Mortgage Interest Deductions

If you financed your land purchase with a loan, you have another major tax deduction at your disposal. The interest you pay on your mortgage is typically tax-deductible. This can be a huge help, especially in the early years of a loan when a larger portion of your payments goes toward interest.

For this deduction to apply, the loan must be secured by the land itself. These scenarios allow you to claim this benefit:

• Building a home: If you plan to build your primary residence or a second home on the land, the mortgage interest is usually deductible.
• Investment property: If you hold the land purely as an investment, the mortgage interest can be deducted as an investment interest expense. This deduction is limited to your net investment income for the year, but you can carry forward any unused portion to future years.

This deduction directly reduces your taxable income, making the cost of financing your land purchase more manageable. Just be sure to keep good records of your interest payments and consult the IRS guidelines or a tax professional to make sure you qualify.

Exploring Capital Gains Tax Benefits

One of the main reasons people invest in land is for its potential to appreciate in value over time. When you eventually sell your land for more than you paid, the profit is known as a capital gain. The good news is that long-term capital gains are taxed at a lower rate than your regular income.

Long-Term vs. Short-Term Capital Gains

To qualify for the lower long-term capital gains tax rate, you must own the land for more than one year before selling it. If you sell it within a year of purchase, the profit is considered a short-term capital gain and is taxed at your ordinary income tax rate, which is higher. Therefore, holding onto your land for the long haul is a smart tax strategy.

Current long-term capital gains tax rates are 0%, 15%, or 20%. For most people, this is a much better deal than paying their standard income tax rate on the profits.

The 1031 Exchange

There’s another powerful tool for deferring capital gains taxes called a 1031 exchange, also known as a like-kind exchange. This IRS provision allows you to sell your investment property and reinvest the proceeds into a new, similar property without paying capital gains taxes at the time of the sale. You essentially roll your profits from one investment into the next.

This is an excellent strategy for real estate investors who want to grow their portfolio. Taxes are deferred, not eliminated, but a 1031 exchange allows you to keep more of your money working for you in the real estate market.

Using Land for Business or Agricultural Purposes

The tax benefits can get even better if you use your land for business or farming. The IRS allows you to deduct a wide range of expenses related to operating a business on your property.

Common Business Deductions

If your land is part of a business operation, like a farm, ranch, or timber operation, you can deduct expenses that are both ordinary and necessary for that business. These can include the following:

• costs for tools and equipment
• salaries for employees
• expenses for maintaining the land, like fencing or irrigation
• costs of seeds, fertilizer, and other supplies

Conservation Easements

For landowners who are passionate about preserving nature, a conservation easement can offer a substantial tax benefit. A conservation easement is a legal agreement where you voluntarily restrict the development of your land to protect its natural resources. In exchange for donating these development rights to a qualified land trust or government agency, you can receive a federal income tax deduction.

The deduction is based on the appraised value of the conservation easement, which is the difference between the land’s value with and without the development restrictions. This can be a powerful financial incentive for landowners to protect forests, wetlands, and wildlife habitats for future generations.

Putting It All Together

Land ownership comes with a lot of responsibility, but it also opens the door to some great financial benefits, especially when it comes to taxes. By taking the time to understand these advantages and work with a tax professional, you can make your investment work smarter for you.

Ready to invest? Land Limited frequently has land for sale in Washington and many other US states. When you work with us to purchase property, you get the best rates, top-tier land, and no middlemen. Explore our currently available lots online today and reach out if you have any questions.