Tax Impact on Vacant Land Owners
I was thinking about the few land owners in Nevada that do own some of this land and what the tax impact is on them for owning this land, and more specifically how the TCJA (the Tax Cut and Jobs Act) of a few years ago, how that impacted them. So I wanted to share that with you real fast. I hope this can help some of you who might own vacant land, land that’s not being used for anything. Maybe give you some ideas or maybe just inform you, you may not be aware of how this land is treated for tax purposes. So vacant land that’s not being used is treated as an investment and there have been some changes in the items that we get to deduct that relate to that land. I’m going to use my dad here as an example. Hi dad if you’re watching this. My dad some years ago owned a little bit of vacant land. It was some farm land although he didn’t farm it, but when he owned it we would deduct taxes and the interest as well as some of the carrying costs. So for instance, every year he paid a fee to the water company that he had to pay in order to maintain the water rights on the land. We would deduct that. They were all itemized deductions and occasionally there would be other expenses and he would deduct those as well. The TCJA changed that and there’s some things you should be aware of.
If you own vacant land and you’re paying interest on it, the interest is still deductible. It’s considered investment interest which means it’s only deductible to the extent that you have investment income, but it is deductible, and if it’s not deductible in any given year, lets say you don’t have any investment income, you can still take the investment interest though it won’t give you any current year benefit, it’ll carry forward to the future years and offset future investment income so that’s great. Taxes- you can deduct those and taxes on vacant land are not subject to the $10,000 limit on taxes that many of you are probably familiar with, so you can actually deduct them above and beyond the $10,000 so that’s great. Here’s the biggest change though, the carrying costs. If you have other carrying costs on the land, you cannot deduct those. They’re not deductible any more. You can’t itemize. You can’t deduct them as itemized deductions and, here’s the kicker, you can’t even add those costs to the basis of the land and reduce your gain when you sell eventually down the road. This is a big hit for some people who own land. I hope that informs you.
Now what can you do about it? Well you know there’s a number of things. If you own vacant land you can develop it, you could in any sort of way turn it into productive use property, you could turn it into a farm, you could (of course you look at this land, they aren’t turning that into a farm unless they’re farming Joshua trees) build a house on it, turn it into a residency, you could build commercial property or business property with buildings on it. In other words, just turn it into productive use and get it out of the investment bucket. That is one way to solve the issue. Maybe that’s not something you want to do. There are other options.
You could 1031 exchange the land for something else, for something that’s not just raw land. You could sell the land and then you have a gain on the land, but you could defer that gain if you were to roll your gain over to a qualified opportunity zone. Qualified opportunity zones are all around the country. They’re essentially distressed areas and if you invest in those areas, you get to defer capital gains. So you could defer your capital gains by investing in a qualified opportunity zone. In addition you could actually stay invested in a qualified opportunity zone and hold that investment for more than 10 years, and actually start to accumulate tax free appreciation on your investment, so that’s an option. There’s a few options obviously. You’ve got a handful of options. Of course you can always just hold it and that’s fine too. I hope now you’re informed and you can make a little more informed decision about the land.
If you have questions about it, contact me. There’s often some creative things we can do. Lets figure out what’s best for you in your unique tax position. Maybe you don’t need any of that at all and holding it is just absolutely fantastic or maybe you’ll find that we can actually save you a whole bunch of money by making some tweaks.