Understanding Tax Deductions for Raw Land Investments

Investing in raw, unimproved land offers a lower-maintenance path into real estate, free from the obligations of managing tenants or structures. But tax treatment for raw land differs from that of developed property. Property taxes on investment land are deductible if you itemize, and unlike the $10,000 cap on personal property taxes, this limit does not apply to investment property. If you finance the purchase, the interest may also be deductible as an investment interest expense—limited to your net investment income, with unused amounts carried forward to future years.

However, not all expenses related to raw land are currently deductible. Under current tax law (effective through 2025), the IRS has suspended deductions for miscellaneous itemized expenses such as legal fees, travel, insurance, and accounting services related to land management. These costs cannot be deducted or added to the land’s basis at this time. Land itself is not depreciable, but certain land preparation expenses—like grading for a future structure—may qualify for depreciation, while others, such as general clearing or landscaping, must be capitalized and added to the cost basis of the land.

For taxpayers who don’t itemize, there’s still a tax-saving option: capitalizing costs. Electing to capitalize property taxes and interest allows you to add those amounts to the land’s basis, which reduces taxable gains when you eventually sell the property. For example, if you purchase land for $10,000 and capitalize $8,000 in eligible expenses, your cost basis becomes $18,000—meaning you only owe tax on gains above that amount. It’s also important to note that raw land held for appreciation is generally not subject to passive activity rules, unless the land is being developed or improved for active business use.