When calculating the taxes due on vacant land, the IRS takes into consideration anything artificial that has been attached to the property. Although vacant land might not include any houses or commercial buildings, these improvements can affect the land's overall value by increasing the land owner's economic benefit. This increases how much you will owe in taxes and determines what tax deductions you can and cannot receive.
What Counts as an Improvement?
By definition, an improvement is anything artificial attached to a piece of land. It is a neutral term used to classify any addition to the property, regardless of whether it actually "improves" the way the property looks. Because these improvements are considered to be immovable, they become part of the real estate that transfers with a sale. This contrasts with any personal property that is considered moveable and independent of real estate or real property during a property sale. Improvements typically include buildings, sidewalks, roadways, parking lots, driveways, street lights, any pavement, sewer systems and fences.
How is Land Still Vacant with Improvements?
While it is easy to classify natural or raw land that hasn't been changed as vacant land, the IRS still classifies many other types of land as vacant. For example, land may still be considered vacant if it has roadways, parking lots or some structures with no utility hookups or current uses. Vacant land also may have a mobile home without a permanent foundation that is considered detached personal property but still with some attached improvements like a driveway or fence. Lastly, land may still be considered vacant if it is used for agricultural grazing or forestry. Because of these exceptions, improvements to natural, vacant land must be listed individually in tax assessments.
What Tax Benefits Do I Get?
In many cases, the vacant land itself will appreciate in value over time. However, improvements such as fences, roadways, structures and bridges will slowly lose value over time. In those cases, the IRS allows properties owners to report depreciation in the form of a tax deduction.
What Can I Write Off?
While you can receive a tax break from depreciation, you cannot write off any improvements as expenses during tax filing. Instead, these improvements as capitalizations that increased the value of the land. As expected, you would owe more taxes on a higher valued piece of land than a lower valued piece of land without improvements. Over time, however, you may write off repairs to the improvements as expenses.
- Modern Real Estate Practices: Galaty, F., et. al.
- IRS: Publication 523
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- W.J. McCluskey, Owiti A. K'Akumu, and Washington Olima, "Land Value Taxation -- Chapter One: Theoretical Basis of Land Value Taxation," Page 3. Ashgate Publishing, 2005. Accessed June 17, 2020.
- Lincoln Institute of Land Policy. "Land Value Tax Holds Promise for Cash-Strapped Cities and Towns." Accessed Feb. 5, 2020.
- Angus Stevenson and Maurice Waite. "Concise Oxford English Dictionary," Page 18. OUP Oxford, 2011. Accessed June 17, 2020.
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- Tax Foundation. "Reviewing the Deadweight Loss Effects of High Tax Rates." Accessed Feb. 5, 2020.
Laura Kingsbury is the director of team support for a successful real estate brokerage, a realtor and an experienced writer. She holds a Bachelor's in journalism and more than 200 clips in four different newspapers and blogs including Andrew Mitchell & Company, "The Penn," "Butler Eagle" and Out Pittsburgh.