John Bullis: Tax elections for vacant land interest and property taxes
The new tax law gives you options to consider for every year from now through 2025.
Interest paid on a vacant lot or unproductive land is either (1) deductible as investment interest expense if you itemize deductions on Schedule A of your form 1040 or (2) can be “capitalized” and added to your tax basis (cost) of the land and that will reduce your gain on sale in the future.
Property taxes on the vacant land or unproductive land can be (1) deductible as property taxes if you itemize deductions or (2) can be “capitalized” and added to your tax basis in the land that will reduce the gain when sold.
The new $10,000 limit on itemized deductions for taxes does not include property taxes on vacant land. Vacant land is a tax code section 212 investment and property taxes on the vacant land are exempt from the limit.
However, each year, you must do a special election to capitalize carrying costs under IRC Section 266. The election can be for both interest and property taxes on the vacant land and is a benefit only if you do not itemized deductions. Each year you can decide what is best for you, itemizing or capitalizing. That election must be done with your return, is attached as part of the return.
The “investment interest” has some special rules. If you have investment income (interest, dividends) then the investment interest can be deductible up to the income. If you don’t have investment income, or not enough, the interest expense not allowed as a deduction carries over to future years and can be a deduction then, or until used up.
Other costs of the vacant land such as mowing the weeds or grass and insurance premiums are not deductible as an itemized deduction under the new law and are not something you can capitalize.
The main thought is first determine if you will claim itemized deductions or the standard deduction. If you will save more tax with the standard deduction, then make the annual election and capitalize the interest and property taxes for tax savings in the future. When looking at the itemized deductions, remember the property taxes on the vacant land can be an itemized deduction even if your other taxes are limited to $10,000.
It is another example of how our tax laws are far too complicated. I like the idea I heard that said every member of Congress has to prepare their own tax return by themselves. Maybe then they would realize what the rest of us have to put up with.
Did you hear? “The best way to find out what we really need is to get rid of what we don’t.” – Marie Kondo