While your ability to deduct mortgage interest is subject to a range of limitations, property taxes are treated differently. If you're eligible to deduct property taxes under IRS rules, you can deduct the taxes for just about possession on which you pay them -- houses, land, cars, and airplanes, for example. Unimproved land held as a investment gets treated differently and, potentially, even more favorably.
Personal Use Land
For property tax on anything you personally own, including unimproved land, to be deductible, the Internal Revenue Service has a few basic rules. The property must be yours, you must be responsible for the payment of the tax, and you have to actually pay the tax. If those three conditions apply and the property tax is a true tax tied to the value of your property, as opposed to a charge for services that your county or city offers, you can deduct it on Schedule A with your other itemized deductions.
Property Tax Deduction Limitations
While the IRS doesn't specifically limit your property tax deductions, the agency has three ways in which it can limit your itemized deductions. First, if you claim the standard deduction and don't itemize at all, you won't be able to specifically deduct your property taxes. Second, if your adjusted income exceeds $300,000 if you're married or $250,000 if you're single, the IRS starts reducing the value of your itemized deductions, as of publication. Third, if you're subject to the alternative minimum tax, which is a special tax that trades most of your deductions and exemptions for a special tax rate and single large exemption, you won't be able to write off any property taxes.
When you own your land for investment purposes, as opposed to for personal use, you don't write off property taxes as a personal exemption. You get to subtract all of your expenses, including property taxes, from your income to find your investment profit or loss. If you have income from your land, like if you rent it out to a farmer, your property taxes reduce your taxable profit. Land where you don't have any income, though, will have a loss that you can use to offset other income that you earn from rental houses. If your land is your only investment and you have a loss because of your property taxes, you might still be able to deduct it.
Passive Activity Losses
To the IRS, land held as an investment is considered passive income. While you can usually use passive losses to reduce other passive income, you usually can't use them against active income, like what you earn from working. However, the IRS has a loophole that lets you claim up to $25,000 of passive losses per year as long as your modified adjusted gross income is $100,000 or less. If your income is above this threshold, your write off goes down by $1 for every $2, and it completely phases out if your income is above $150,000. However, if you qualify, you can write off your property taxes on investment land even if you don't or can't claim it as an itemized deduction.
- IRS.gov: Topic 503 -- Deductible Taxes
- IRS.gov: Six Facts About Choosing the Standard or Itemized Deductions
- Forbes: Pease Limitation Puts A Lid On Itemized Deductions For Wealthy Folks
- SmartMoney: The Alternative Minimum Tax (AMT)
- IRS.gov: Schedule E (Form 1040)
- Bankrate.com: An Exception to Passive Activity Loss Rules
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