While a range of limitations affects your ability to deduct mortgage interest, the IRS treats your property taxes differently. If you're eligible to deduct property taxes under IRS rules, you can take the deductions for just about any possession on which you pay them—houses, land, cars, and airplanes, for example. Unimproved land held as an investment gets treated differently and, potentially, even more favorably. As of 2018, the personal exemption ceiling has increased due to the Jobs and Tax Credit Act, so you'll want to double-check that you have enough overall deductions to make itemizing your property tax deductions worthwhile.
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 two 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 you're subject to the alternative minimum tax (AMT), 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. You're likely safe for now regarding the AMT because the recently-passed Tax Cut & Jobs Act has raised the income threshold so that only about 5 percent of tax filers need to deal with the AMT. The act, however, reverts back to the pre-existing law in 2025, so this may become an issue for you at that time.
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 because 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, such as income you earn from other assets such as rental houses. If your land is your only investment and you have a loss because of your property taxes, check with your CPA because you might still be able to deduct it within certain limits.
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.
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