Tax Deductions for Investments in Raw Land

Purchasing raw (unimproved) land can be a great way to get into real estate investing.

Raw land is ordinarily cheaper than land with buildings and other improvements. Moreover, you don’t have the expense of handling building maintenance and other upkeep, not to mention the headaches of dealing with tenants if you rent improved property.

But the tax benefits for owning raw land as an investor are much more limited than for improved property. Some expenses are deductible as itemized personal deductions. Many others aren’t deductible at all. Moreover, if you don’t itemize, you get no immediate benefit from your deductions.

Here’s what you can deduct:

·       Property taxes (not limited to $10,000, as is the personal deduction for other property taxes)

·       Interest on money borrowed to purchase raw land (limited to annual investment income)

Here’s what you can’t deduct:

• Other carrying costs that used to be deductible as miscellaneous itemized deductions, including legal and accounting fees, insurance, and travel expenses (these deductions may return in 2026)

• Land preparation costs (such as grading) that are “inextricably associated” with the land itself and not “directly associated” with a building or another structure.

If you don’t have enough total personal deductions to itemize, you get no current deductions at all for the costs of owning raw land. In this case, you should elect to capitalize your deductible costs—that is, add these expenses to your land’s cost basis.

Capitalization reduces any taxable profit when you sell the property for a capital gain. This isn’t as good as a current deduction at ordinary income tax rates that are as high as 37 percent, but it’s better than no deduction at all. You need to file the election to capitalize each year.