Unimproved land is often seen as a valuable investment by real estate investors. Land is limited resource that can be held on to and sold for the amount of value growth that has occurred. 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 made better in some way, usually by building something on it or hooking up utilities to it. Other types of improvements may include changed zoning, completing landscaping and grading, and constructing roadways.
Have you ever seen an empty plot of land and wondered if buying it would make you rich one day? You may have heard stories about people who bought land for pennies many years ago and now it’s worth millions. Tax authorities and financial experts may talk about land as an investment property, but is it really an investment property? Let’s find out!
What Exactly Makes Something an “Investment Property”?
Let’s clear up some terms before we get into the details of land. When we talk about “investment properties,” we usually mean things that people buy with the goal of making money or seeing their value rise over time, not for their own 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.
In 2010, I bought a small plot of land outside the city limits. People thought I was crazy to “waste money on dirt,” but since then, that land has become worth twice as much. 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 that is zoned for residential development can be very valuable, especially in places where the population is growing. 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:
-
Limited supply – They’re not making any more of it! As Mark Twain supposedly said, “Buy land, they’re not making it anymore.”
-
Low maintenance – Unlike buildings, raw land doesn’t need repairs, renovations, or constant attention.
-
No depreciation – Land doesn’t wear out or become obsolete.
-
Fewer management headaches – No tenants means no midnight calls about broken toilets!
-
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:
-
Can be illiquid – It might take months or years to sell land, especially in remote areas.
-
Typically generates no immediate income – Unless you lease it out, raw land doesn’t produce regular cash flow.
-
Carrying costs – You’ll pay property taxes and possibly maintenance costs while earning nothing.
-
Development can be expensive – If you plan to develop the land, prepare for significant costs.
-
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?
When someone deals in real estate, they’re usually an investor who buys land to hold on to for a short time (usually less than a year) and then quickly sells it 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. If you only keep a property for a short time (usually less than a year) before selling it, you probably fall under the dealer category.
- How hard and what kind of efforts the taxpayer made to sell the property;
- How much advertising, building, clearing, and dividing was done to boost sales and profits;
- How frequently the taxpayer sells property—e. g. If a taxpayer only sells land every three years, that might not make them a “dealer,” but if they do it every month, it’s likely that they are one.
- The taxpayer’s intent. If taxpayers plan to buy the land to add to their stock of undeveloped land that they will then sell for a profit, they are more likely to be labeled 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. A lot of cases have been brought up in this area of tax law, so taxpayers should talk to a tax lawyer to find out if they are considered a real estate dealer.
