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Land Purchase and Federal Taxes

1,782 Views | 8 Replies | Last: 2 yr ago by Mas89
rme
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11:15a, 9/24/23
AG
What are my options for deducting expenses for unimproved land? I think it's only interest if I get a loan since land is ag/timber exempt.

1. Purchase as an individual:
Does unimproved land qualify as a second property? Or do I need to put a trailer or cabin on it?

2. Purchase as an LLC:
Can I buy land in my business and deduct all expenses? If so, can I transfer to myself in a few years? A land purchase fits with my business activities.

Thanks!

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dsvogel05
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5:57p, 9/24/23
AG
Put it an LLC so you can deduct operating expenses, interest and depreciation.

I'm not a CPA and this is not tax advice.
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FightinTAC08
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8:47p, 9/24/23
AG
An llc is a legal entity. How you treat for tax purposes is up to you. A single member llc is generally disregarded for federal income tax purposes unless you elect to be a corporation. Get a partner and you could be a partnership.

At that point you are basically subject to the individual rules.

Land is not depreciable.

Investment interest Expense is limited to investment interest income.

Llc's will have expenses that individuals won't.

Grading/clearing/improving raw land are generally capitalized to the basis of the land and not deductible.

Other expenses "may be deductible" such as property taxes on your 1040.

Just buy and hold as an Indiviual and simplify your life and record keeping.

I am an accountant but not tax advice and I'm drunk sulking after that cowboys game.

Eta:
Separate rules exist for making a place a "second residence" which I guess could change the facts to try and deduct mortgage interest. I doubt a trailer not on a mortgage but an auto/personal loan comes anywhere close to qualifying .




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rme
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In reply to FightinTAC08 • 5:44a, 9/25/23
AG
Interest is really the basis for my question. I know there's more to the tax code, but it seems like interest income may not limit interest expense.

https://www.irs.gov/newsroom/basic-questions-and-answers-about-the-limitation-on-the-deduction-for-business-interest-expense

A1. Generally, taxpayers can deduct interest expense paid or accrued in the taxable year. However, if the section 163(j) limitation applies, the amount of deductible business interest expense in a taxable year cannot exceed the sum of:
[ol]
  • the taxpayer's business interest income for the taxable year;
  • 30% of the taxpayer's adjusted taxable income (ATI) for the taxable year; and
  • the taxpayer's floor plan financing interest expense for the taxable year.
    • [/ol]
    Also, as a business with <$27 million in gross receipts, it looks like there's no interest limit under 448(c).
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    FightinTAC08
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    5:54a, 9/25/23
    AG
    That is 163(j) and applies to business interest income and business interest expense.

    Interest on holding a second property as raw land would be investment interest expense or personal interest expense which are a different categories with different rules.

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    FightinTAC08
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    6:08a, 9/25/23
    AG
    I'm assuming your llc is not a c corporation but rather a pass through where you report all items on schedule c?

    Corporation interest expense is per se all business interest so then you could benefit from that interest.

    If not corporate, Unless your business is in the business of "trading or dealing" in land, gonna be hard to qualify it as anything other than investment interest.
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    rme
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    In reply to FightinTAC08 • 6:47a, 9/25/23
    AG
    Thank you for the clarification. My LLC is an S corporation for tax purposes.
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    FightinTAC08
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    8:02a, 9/25/23
    AG
    take a look at the instructions for Form 1120-S and IRS Publication 550. I think those will give you enough to get started.

    on the 1120-S investment interest income goes on Schedule K Line 4 and investment interest expense goes on Schedule K Line 12b. All investment income and investment expenses which could include more than interest go on line 17a/b.
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    Mas89
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    In reply to rme • 8:08a, 9/25/23
    AG
    Depending on your business model, you may be able to expense or depreciate improvements on the property you purchase. Fencing, gates, water wells, barns, etc.
    Just get an appraisal of ALL improvements on the property when purchasing.
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