Interest incurred on loans used to purchase land is deductible in certain situations. Whether or not the interest can be deducted depends on why the buyer purchased the land. Interest on land purchased for personal use isn't usually deductible, but interest on land purchased as an investment is. Land purchased for business purposes is also deductible.
Land Purchased for Personal Use
If you're using the land for personal use, the loan interest is usually not deductible. The Internal Revenue Service does allow homeowners to deduct mortgage interest expense on both their first and second homes. However, to be a qualifying loan, the proceeds must be used to either buy, improve or build a home. If the loan proceeds are used to buy the land but not to build the home, the loan isn't eligible.
If you do have a loan to build a home -- referred to as a home construction loan -- the interest is deductible as an itemized deduction. You should get a Form 1098 from your lender every year that notes how much you paid in eligible interest. Report interest expense on line 10 of Schedule A.
Land Purchased as an Investment
If you purchased the land as an investment, the interest expense from the loan is probably deductible as investment interest expense. The IRS allows taxpayers to deduct interest paid if the loan proceeds are used to purchase an investment. Investment interest expense is only deductible to the extent that you have investment income. If your interest expense exceeds your investment income, you can carry forward the excess to the next tax year. Investment interest expense isn't deductible if it's for a passive activity. That means you need to actively participate in the investment or business to claim the deduction.
Report investment interest expense on line 1 and any carryover interest expense on line 2 of Form 4952.
Land Purchased by a Business
Tax deductions for businesses are much more flexible than they are for individuals. With few exceptions, businesses can deduct any expense that's a legitimate cost of doing business. That means, if a sole proprietor, S corporation, partnership, limited liability company or C corporation purchases land for business use, the interest expense is deductible.
While the interest expense for the land is deductible, the interest expense incurred to construct a building is not. Instead, construction interest expense should be capitalized -- meaning that it's added to the cost of the building -- and depreciated over the life of the asset.
- TurboTax: What are Deductible Investment Interest Expenses?
- Internal Revenue Service. "About Form 4952, Investment Interest Expense Deduction." Accessed Jan. 27, 2020.
- Internal Revenue Service. "Form 4952: Investment Interest Expense Deduction," Page 3. Accessed Jan. 27, 2020.
- Internal Revenue Service. "Topic No. 403 Interest Received." Accessed Feb. 18, 2020.
- Internal Revenue Service. "Form 4952: Investment Interest Expense Deduction," Page 1. Accessed Jan. 27, 2020.
- Internal Revenue Service. "Form 4952: Investment Interest Expense Deduction," Page 4. Accessed Jan. 27, 2020.
Based in San Diego, Calif., Madison Garcia is a writer specializing in business topics. Garcia received her Master of Science in accountancy from San Diego State University.