"Property basis" is a term used to describe the money you spent to buy and maintain a piece of real estate like land or anything built or attached to that land. If you later sell that piece of property, you only pay tax on the amount of money you made above your property basis.
Costs associated with the purchase of a property can either be added to the property basis or treated as a tax-deductible expense — but not both. Other than the purchase price, you can include a lot of other costs in the property basis. Add to the property basis any real-estate taxes you pay on behalf of the seller that he does not reimburse you for. Also add to the basis your settlement costs. These are the fees and closing costs associated with buying a property. Include fees like title fees, charges for installing utilities, legal fees, survey fees, transfer taxes, title insurance and any money the seller owes you but you agree to pay. You can’t include in property basis the costs associated with getting a loan to purchase the property, so mortgage interest is not added to the property basis.
Although you don’t add mortgage interest to the property basis, an even greater advantage is that you may be able to write it off on your taxes. If your property secures the mortgage debt, meaning it can be used to pay off the mortgage if you default, and the debt is secured by a qualified home, you might be able to deduct the mortgage interest. A qualified home is your home or any second home that has sleeping, cooking and toilet facilities. So land by itself does not qualify but any property like a house, condo, boat, mobile home or trailer does. A second home only qualifies if you’re not renting it out, unless you also live in it during the year for an amount of time at least equal to 14 days or 10 percent of the number of days it was rented out during the year, whichever is longer.
You also need to distinguish between home-acquisition debt and home-equity debt. Home-acquisition debt are mortgages you use to buy, build or improve a home. Home-equity debt is a mortgage you use for other purposes, like a line of credit. According to the IRS rules for 2012, home acquisition debt is limited to $1 million for a full deduction ($500,000 if married filing separately). Home equity debt mortgages are limited to $100,000 ($50,000 if married filing separately).
If you can’t meet the conditions for qualified home or your debt exceeds the limits for home equity debt, you might be able to claim a deduction for investment expense. Generally, when you borrow money in order to invest and earn a taxable income, the interest on that loan is tax-deductible up to certain limits. This would apply to mortgage interest on a piece of land you intend to sell later at a profit or a home equity line of credit you use to make investments.
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- What Are the Various Types of Liens?
- Tax Deductions for Land Held for Investment
- Tax Consequences for the Sale of an Inherited Property
- Do I Report the Sale of an Inherited Home?
- The Difference Between Tangible Taxes Vs. Property Taxes
- When Is Mortgage Interest Not Deductible?
- How Do Property Taxes Apply to Vacant Land Investments?
- How to Calculate Land Value for Tax Purposes