Using land as a tax write-off is a complex topic that intersects multiple areas of tax law, primarily dealing with depreciation, deductions, and potential long-term capital gains. The short answer is: yes, you can use land for tax write-offs, but the specifics depend on various factors such as the type of land, your purpose for owning it, and local tax regulations.
Land, being a natural resource, doesn't depreciate in the same way that tangible assets like buildings or equipment do. However, there are still several tax strategies you can employ to potentially lower your tax burden when owning land.
Depreciating Land Improvements
While the land itself can't be depreciated, any improvements made to the land, such as buildings, roads, or fences, can be. These improvements are typically depreciated using the Modified Accelerated Cost Recovery System (MACRS), which applies accelerated depreciation rates to faster recover the cost of the improvement.
For example, if you own a farm with a barn, you can depreciate the barn over seven years as a MACRS property, rather than the 39-year recovery period for non-residential real property.
Adjusted Cost Basis
Landowners often mistake the purchase price as the basis for calculating depreciation. However, you should adjust the cost basis by adding the costs directly related to acquiring the property, such as closing costs, legal fees, real estate commissions, and any transfer taxes.
Moreover, if you inherited the land, your basis is generally its fair market value at the time of inheritance. This provides a potential tax savings opportunity if the land's value has increased since it was originally purchased.
Section 199A Deduction for Qualified Business Income
If you own land used for business, such as farming or operating a timber business, you may qualify for the Section 199A deduction. This deduction allows pass-through entities (like sole proprietorships, partnerships, and S corporations) to deduct up to 20% of their taxable income.
To qualify, at least 50% of the gross income must come from a passive activity, and the property must be held for more than one year.
The General Business Credit and Land Investments
Land investments can also qualify for the General Business Credit (GBC), which promotes certain business activities by providing a tax credit. The GBC can help reduce alternative minimum tax (AMT) liabilities for non-corporate taxpayers.
To qualify, the GBC must reduce the alternative minimum taxable income, and the earned income cannot be from a passive activity. However, certain types of land investments, such as solar, wind, and geothermal energy facilities, can qualify for the GBC.
Earned Income Tax Credit (EITC) and Land Investments
Earned income tax credit (EITC) is another tax benefit that landowners may not initially consider. As a refundable credit, it offsets the amount of tax owed by low- and moderate-income workers.
To qualify, earned income must come from operating a sole proprietorship, partnership, or S corporation. The EITC can provide significant tax benefits for landowners, particularly those involved in agriculture or running a small business on their land.
In the final analysis, landowners can indeed use land as a tax write-off, but the strategies employed will vary based on the specific circumstances. It's crucial to consult with a tax professional or accountant familiar with your unique situation to ensure you're taking advantage of all available tax benefits.