Are financing interest on land that your purchase tax deductible?
February 15, 2009
I am interested in buying land for future development (home). The seller is offering his own financing (double of the market interest though). Will the interest be tax deductible? Or should I pay this off (with a temporary load from family) and try to refinance? I am not sure a lender would offer me a loan if it is for only land. Eventually, I will get a construction loan and build my home, but I am not prepared financially to take on this next step until mid 2008.
Interest deductions are reported on Form 1040 Schedule A. The instructions for Schedule A say on page A-3:
“Lines 10 and 11
Home Mortgage Interest
A home mortgage is any loan that is secured by your main home or second home. It includes first and second mortgages, home equity loans, and refinanced mortgages.
A home can be a house, condominium, cooperative, mobile home, boat, or similar property. IT MUST PROVIDE BASIC LIVING ACCOMMODATIONS INCLUDING SLEEPING SPACE, TOILET, AND COOKING FACILITIES. [caps added]”
Since vacant land does not provide basic living accommodations, it is not deductible as home mortgage interest. It may be deductible as investment interest on line 13, but only to the extent that it offsets investment income from interest and dividends. You’d need to complete Form 4952 to figure your deduction.
Another strategy is to pay for the land with proceeds from a second mortgage or home equity loan on your main home that you presently own. If you do not presently own a home, this option is not available to you.
It might be best to consult with a tax professional. Don’t call until after April 17th.
There are loans you can get for land only. Sellers who offer to finance themselves generally do not pay taxes on the interest they recieve from you and so claiming the interest on your taxes could cause you both to get audited. I would also suggest that if you do not want to go through a traditional lender to get a land only loan and choose to pay the higher interest rate from the seller that you have an attorney draw up a land contract and that you have it recorded at the recorders office. It will make it easier to refinance the land later and you will then be able to claim the interest on your taxes. You should beable to either way but if the seller is not claiming the income from the interest as I said you can both be audited and that may cause conflict between the 2 of you in the future. Dont get me wrong he is supposed to claim it but that does not mean that he will. Farm Credit services is one lender that offers loans on land only and there are others as well. You can call a loan broker and they can tell you what lenders offer land loans in your area.
If you’re planning on building a home for personal use, no, the interest on the land is not tax deductible until you are living on the property.