The Internal Revenue Service provides many tax advantages to homeowners selling real property with improvements, such as a house, in the form of deductions for mortgage interest and gains realized from a sale up to $500,000 for couples filing joint returns. When vacant land is sold, fewer expenses may be tax-deductible, but property owners should consider those that may lead to a reduced tax bill as a result of a sale.
Owners of vacant land must pay property taxes to local jurisdictions based on market value. For example, in New York, every parcel of real property is assessed for property taxes, including vacant land, farms, houses and office buildings, according to the New York State Department of Taxation and Finance. Typically, property taxes are deductible on itemized returns for the year in which they are paid.
Selling a Main Home
Homeowners selling their main home are entitled to exclude up to $250,000 for individuals or $500,000 for couples from income taxation. A main home qualifies if it has been a primary residence for at least two of the five years prior to the sale. If land is sold where a main home is located, but not the home itself, the gains may not be excluded from taxation. Vacant land does not qualify as a main home, according to the IRS, unless it is adjacent to the land containing your main home, was owned and used as part of your main home and was sold within two years of the sale of your main home. If these tests are met, the sale of the vacant land and the main home are treated as one sale and subject to the maximum gains limits in one lump sum.
If an investment property is used for rental income, the IRS permits the owner to recover associated costs through depreciation. Because a home's structure is considered to have a determinable useful life, its value is considered to depreciate over time, and a tax deduction is allowed for this reason. The land beneath or adjacent to the home, however, cannot be depreciated because it does not wear out or become obsolete, according to the IRS. An exception to this rule would be when land is prepared for use, such as landscaping, although the costs must be associated with a depreciable property so that a life can be determined.
When transferring ownership of vacant land, certain expenses may be tax deductible. Real estate commissions paid to agents by the owner usually are deductible from the amount realized from the sale of vacant land. Advertising expenses and legal fees to prepare any contracts or documents necessary for the transfer of ownership may be deductible. If the financing for the vacant land purchase involves a mortgage and the owner contributes to loan fees or points, those expenses may be deductible. Transfer or real estate excise taxes levied on the sale of the vacant land by local jurisdictions also may be deductible expenses.