If you incur investment expenses on raw land, such as interest, property tax, insurance, weed abatement, etc., you have the option to capitalize the expenses by attaching an election to your tax return. If you elect to capitalize these expenses, instead of getting a current deduction for these items, they would be added to the cost basis of the land and would reduce your gain when the property is sold.
The reason you should consider making this election is that investment expenses do not typically give you a tax benefit. This is because those types of expenses must exceed two percent of your income in order to be deductible and may not be deductible at all due to the alternative minimum tax.
If you do not make the election to capitalize these expenses and you are not able to deduct them either due to the alternative tax or the two percent rule, they are lost and cannot later be deducted from the gain upon sale of the land.
For example, assume you pay $1,000 in insurance on a piece of raw land. Further assume your adjusted gross income (AGI) is $100,000. The insurance expense is deductible as a miscellaneous itemized deduction. However those deductions must exceed 2% of your AGI to provide you a tax benefit. In this care 2% of the $100,000 AGI s $2,000, so expensing the $1,000 will not provide you with any tax benefit since it is below the $2,000 floor. If you had no other miscellaneous deductions you would be wise to make an election to capitalize the costs and add them to the cost basis of your land instead of currently deducting them.
