When thinking of what real estate investments to add to your portfolio, you may not immediately think of investing in land. Land may not seem like a fruitful investment because it doesn't yield an immediate income. But if you use your imagination and seek competent advice, investing in land can be a gold mine.
Since you may need to tap into your creative genius when investing in land, the possibilities for the land are endless. And endless possibilities could mean an endless stream of revenue. While this is often an overlooked investment, it's one that you should definitely consider making, but not without first making a few considerations. Here are five to keep in mind.
While land has endless potential possibilities for its use, they could potentially be limited by zoning laws. There are many zoning laws that could dramatically change over the next several years under the Biden administration. As part of Biden's American Jobs Plan, the administration has proposed easing zoning laws and also removing many exclusionary zoning regulations.
If the proposed regulation is passed, parcels of land that were historically used exclusively for single-family homes could also see the development of apartments and multifamily housing units. For land investors, this type of rule change could lead to a lowered value for your parcel of land. For this reason, you should watch Biden's bill closely.
In addition to Biden's potential zoning changes, you should find out whether the land use is restricted by any conservation easements.
Historically, land investors who invested in conservation easements enjoyed a healthy amount of tax deductions during tax season. But as of 2021, the tax benefits surrounding these easements are being heavily scrutinized by the courts. The courts are specifically monitoring any appraisals that appear to be inflated and the subsequent tax deductions claimed as a result of those inflated appraisal values.
This issue has led many investors in conservation easements to tax court for participating in abusive syndicated conservation easements. The IRS has found that many of these easements were over-appraised, and many partners invested in them for the sole purpose of generating losses.
Due to the long series of easement cases that have come before the tax court, receiving an independent appraisal on any parcel of land you plan to invest in is now a must.
In addition to the appraisal, you should also consider researching any community development initiatives in the area before you make an investment decision.
City planning and community development strategies
City planning and community development and zoning laws go hand in hand. As we move into a post-COVID-19 vaccination world, investors should pay close attention to how cities and local municipalities plan to reimagine the world around us after the COVID-19 crisis. As a land investor, keep a close eye on the city planning and development in your jurisdiction -- you don't want your future land investment to lose value because of a future city plan.
Developing the land
While you keep an eye on local community development initiatives, you should also closely monitor proposed federal regulations, specifically the Low Income Housing Tax Credit and the Neighborhood Homes Investment Act. If either of these acts are passed, you could potentially receive a federally funded tax credit to develop and improve your vacant land.
If you decide to leave your land undeveloped, there are still some tax benefits for you to reap. As a landowner, you can claim a deduction for property taxes that you have paid on the property while land remains unimproved. This is great news, since the May 17th filing deadline is quickly approaching. So, if you have to pay property taxes, make sure you inform your tax advisor, since a substantial tax deduction could be part of your financial future.
The Millionacres bottom line
Choosing to invest in land opens up an incredible world of possibilities, but these possibilities are not without making some significant tax considerations. Before investing in land, consult with your tax advisor so you can maximize your return on investment.