Like many tax questions, the answer to whether or not you can deduct the
interest on land that you own is, "It depends." You cannot deduct interest on a lot that you hold for
personal use at some point in the future. However, if the lot is an
investment or will be used to build a home relatively quickly, you can
deduct the mortgage interest, subject to some limitations.
Lot for Personal Use
A lot that you own for your eventual use at some yet-undetermined time in the future isn't tax deductible. To be claimed for the home mortgage interest deduction, a property must
meet the IRS definition of a "qualified home." Qualified homes have
eating, sleeping and bathroom facilities.
Lot for Personal Construction
Interest on land can be deductible if you intend to build a house on it.
You can claim a mortgage interest deduction if you will be completing
and moving into the home within 24 months of when you start claiming the
write-off. The deduction covers your loan on your lot as well as your
construction loan, if any. To be able to claim this write off, the house
under construction must be your first or second house, and your total
mortgage debt must be $1.1 million or less.
Investment Lots
Interest on land held for investment purposes is deductible on Schedule E
as an investment real estate expense. Schedule E lets you subtract all
of your expenses from your rental income to reduce your taxable profit
from real estate rental activities. If you don't have any rental income,
though, you can only use your losses to reduce your regular income up
to $25,000 per year, and only if your adjusted gross income is below
$100,000. The write-off provision gradually goes away for AGIs between
$100,000 and $150,000, and is completely gone above that threshold.
