Unimproved land is often seen as a valuable investment by real estate investors. Land is a finite resource that can be held onto and sold for the amount of appreciation occurred on the property’s value. Like all other investments, land sales are subject to taxation. However, how the land is taxed depends on several factors. This article helps assist landowners in the tax treatment of their property and provides a brief overview of other tax benefits that may be available to land owners and investors.
There are generally two types of land—unimproved and improved land. Unimproved land is vacant land that has had no major structures or utilities placed on it. Improved land is land that has been upgraded in some way, often by erecting a building or creating utility hookups. Other types of improvements may include changed zoning, completing landscaping and grading, and constructing roadways.
Have you ever looked at a vacant piece of land and wondered if buying it could make you rich someday? Maybe you’ve heard stories about people who purchased land decades ago for pennies and now it’s worth millions. But is land actually considered an investment property in the eyes of financial experts and the tax authorities? Let’s dive into this topic and clear things up!
What Exactly Makes Something an “Investment Property”?
Before we jump into the specifics about land let’s get our terms straight. When we talk about investment properties we’re generally referring to assets purchased with the intention of generating income or appreciation in value over time, rather than for personal use.
Most people think of rental houses or commercial buildings when they hear “investment property” But the definition is actually broader than that
An investment property is any real estate that you
- Don’t use as your primary residence
- Purchase primarily to make money from
- Expect to increase in value or generate income
So, does land fit this definition? Absolutely it does!
Why Land IS Definitely an Investment Property
Land is 100% considered an investment property in most circumstances. When you buy land that you don’t plan to use as your primary residence, you’re investing in real estate with the expectation of financial return.
Here’s why land qualifies:
- It can appreciate in value – Just like buildings, land can increase in value over time, especially in growing areas.
- It can generate income – Through leasing to farmers, parking lot operators, or even by installing solar panels.
- It’s a tangible asset – Unlike stocks or bonds, you can actually touch and walk on your investment.
- It has tax implications – The IRS treats land as investment property for tax purposes when it’s not your personal residence.
I remember buying a small plot outside the city limits back in 2010. Everyone thought I was crazy for “wasting money on dirt,” but that piece of land has doubled in value since then! Sometimes the best investments aren’t the flashiest ones.
Different Types of Land Investments
Not all land investments are created equal. Let’s break down the main types:
Raw Undeveloped Land
This is completely untouched land without utilities, roads, or structures. It’s usually the cheapest to buy but might require significant investment to develop.
Agricultural Land
Farmland can be leased to farmers or used for crops and livestock. Many investors love agricultural land because it can provide regular income through leasing while also appreciating in value.
Residential Development Land
Land zoned for residential development can be extremely valuable, especially in growing communities. Developers might pay premium prices for well-located lots.
Commercial Land
Property in business districts or along major highways can command high prices and lease rates. The downside is that commercial zoning requirements can be strict.
Recreational Land
Hunting land, waterfront properties, and mountain retreats fall into this category. While they might not generate regular income, they can appreciate significantly.
Tax Implications: How the IRS Views Your Land Investment
Now here’s where things get interesting (or boring, depending on how much you like tax talk!). The IRS definitely considers land an investment property, and this affects how they tax you.
According to tax experts at SFG Planner, there are several important tax considerations for land investors:
- Property taxes – You’ll pay these annually regardless of whether the land generates income
- Capital gains tax – When you sell land at a profit, you’ll pay capital gains tax
- Deductions – You may be able to deduct certain expenses related to your land investment
- Depreciation – Unlike buildings, raw land cannot be depreciated for tax purposes
One thing that surprises many new land investors is that raw land cannot be depreciated. Buildings deteriorate over time, so the IRS lets you deduct that loss in value through depreciation. But land? The IRS assumes it never wears out.
Can You Deduct Expenses for Land Investments?
Yes! Even tho you can’t depreciate the land itself, you CAN deduct certain expenses related to your investment. According to the SFG Planner blog, these may include:
- Property taxes
- Mortgage interest
- Insurance premiums
- Maintenance costs
- Professional services (surveys, legal fees, etc.)
- Travel expenses to inspect your property
But be careful! The IRS requires that your land investment have a profit motive. If you just buy land and do nothing with it for years, the IRS might classify it as a hobby rather than an investment, which limits your deduction options.
The Pros of Investing in Land
Land has some unique advantages as an investment property:
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Limited supply – They’re not making any more of it! As Mark Twain supposedly said, “Buy land, they’re not making it anymore.”
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Low maintenance – Unlike buildings, raw land doesn’t need repairs, renovations, or constant attention.
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No depreciation – Land doesn’t wear out or become obsolete.
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Fewer management headaches – No tenants means no midnight calls about broken toilets!
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Versatility – You can develop it, lease it, farm it, or just hold onto it.
We’ve owned several rental properties over the years, and let me tell you, our land investments have been BY FAR the easiest to maintain. No tenant complaints, no leaky roofs, no broken appliances!
The Cons of Land Investment
Let’s be real – land investment isn’t perfect. Here are some downsides:
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Can be illiquid – It might take months or years to sell land, especially in remote areas.
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Typically generates no immediate income – Unless you lease it out, raw land doesn’t produce regular cash flow.
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Carrying costs – You’ll pay property taxes and possibly maintenance costs while earning nothing.
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Development can be expensive – If you plan to develop the land, prepare for significant costs.
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Zoning restrictions – Local laws might limit what you can do with the property.
How to Make Money from Land as an Investment Property
There are several ways to profit from land investments:
1. Buy and Hold Strategy
This is the simplest approach. Purchase land in an area likely to grow, hold it long-term, and sell when values increase. This strategy requires patience but can deliver impressive returns.
2. Land Flipping
Like house flipping, but with land. Find undervalued parcels, purchase them, and resell quickly for profit. Sometimes you can add value through simple improvements like clearing brush or getting zoning changes approved.
3. Leasing Options
You can generate income by leasing your land for:
- Farming or grazing
- Parking
- Billboards or cell towers
- Recreational uses (hunting, camping)
- Solar or wind farms
4. Development
Developing land into residential, commercial, or industrial property can multiply its value. However, this requires significant capital, expertise, and patience with local regulations.
Real-Life Example: My Friend’s Land Investment Success
My buddy Jake bought 5 acres of land outside Austin, TX for $100,000 in 2012. Everyone thought he was nuts because it was in the middle of nowhere. Fast forward to 2024, and that land is now worth over $500,000 because the city has expanded in that direction. He’s been leasing it to a local farmer for $2,000 per year, which helps cover his property taxes.
What’s more interesting is how he’s handled the tax situation. Jake has meticulously documented all his expenses related to the property – from the mileage driving out to inspect it quarterly to the professional survey he had done. These deductions have helped offset some of the leasing income for tax purposes.
Is Land a Good Investment for YOU?
Land can be an excellent investment, but it’s not for everyone. You should consider investing in land if:
- You have a long time horizon
- You don’t need immediate cash flow
- You understand the local market
- You’ve done thorough research on the specific parcel
- You have the financial resources to carry the costs
On the flip side, land might not be right for you if:
- You need regular income from your investments
- You have limited capital
- You want a highly liquid asset
- You’re not familiar with real estate markets
Common Questions About Land as Investment Property
Can I include land in my retirement portfolio?
Yes! Land can be an excellent diversification tool for retirement portfolios. Some investors even hold land in self-directed IRAs, although this requires specific expertise and proper structuring.
How is land taxed differently from other investment properties?
The main difference is that land cannot be depreciated for tax purposes. Buildings and improvements can be depreciated over time, but the IRS considers land a non-depreciating asset.
What due diligence should I do before buying land as an investment?
At minimum, you should:
- Check zoning regulations
- Research future development plans in the area
- Verify access to roads and utilities
- Review environmental assessments
- Check for liens or encumbrances
- Understand the tax implications
- Get the land professionally surveyed
Can I get a loan to buy investment land?
Yes, but land loans typically have higher interest rates, larger down payment requirements (often 20-50%), and shorter terms than traditional mortgages. Some investors use seller financing or home equity loans to purchase land.
Conclusion: Land IS Investment Property!
So, to answer the original question: Yes, land is absolutely considered an investment property by financial experts, the IRS, and real estate professionals. Whether you’re buying a small lot in an up-and-coming neighborhood or hundreds of acres of farmland, you’re making a real estate investment that has specific tax implications and potential for returns.
Like any investment, success with land requires research, patience, and a solid understanding of the market. But for those willing to take the long view, land can be a valuable addition to an investment portfolio.
Remember what my grandpa always told me: “They ain’t making any more land, so if you find a good piece at a fair price, grab it!” His wisdom helped our family build wealth over generations, and it might help you too.
Have you invested in land before? Planning to? What questions do you still have about land as an investment property? Leave a comment below and let’s discuss!
Real Estate Dealer or Investor?
To benefit the most from a sale of land, the landowner should determine if they are subject to the ordinary income tax rate or if they can utilize the more advantageous capital gains tax rate. A “dealer of real estate,” as defined by the IRS, will be subject to ordinary income tax rates. On the other hand, an investor in land will be able to apply the capital gains tax rates.
What is a Real Estate Dealer?
A dealer in real estate is typically an investor that purchases land to hold briefly—typically less than 12 months— then quickly sells the land for a profit. Some common factors that are used to determine if a taxpayer is a dealer of real estate are:
- The length of time the taxpayer held the property. Holding a property only for a short period (typically less than 12 months) before selling it leans towards dealer classification;
- The extent and nature of the taxpayer’s efforts to sell the property;
- The extent of advertising, developing, clearing, and subdividing used to increase sales and profit;
- How frequently the taxpayer sells property—e.g., selling land once every three years may not rise to the level of a “dealer,” but selling land every month would likely support a finding that the taxpayer is a dealer; and
- The taxpayer’s intent. If taxpayers intend to purchase the land as part of their inventory of unimproved property to sell for a profit, they will be more likely to be classified as a dealer.
An investor who consistently purchases several pieces of unimproved property in less than a year, with the intent to sell the land for a profit, will most likely be considered a dealer of real estate. Each investor’s situation is different, and the list of factors above is non-exhaustive. This is a highly litigated area of tax law and taxpayers will want to consult with tax counsel to determine if they are considered a dealer of real estate.