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I live in Green Bay, WI in a newer development. We built our house 2 years ago and houses are starting to go up around here. We want to buy the vacant lot next to us so we don't get any neighbors.

I'm trying to figure out what the tax liability would be for owning this land. I am assuming it is considered an investment property. Is there any loopholes or tricks to reduce our liability? Any way to make this land part of our primary residence and if so, could ever sell it off someday as a vacant lot?

Even if you don't know the answer to any of these questions, I would really appreciate a source for where I can find them. I've spent an hour on Google and got nothing.

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There are two sets of tax implications: ongoing yearly taxes, and tax when you sell.

On an ongoing basis, I'm assuming that your city, county, and/or state will extract property tax payment(s) from you on the additional property. According to the IRS, this payment would be deductible:

Deductible real estate taxes are generally any state, local, or foreign taxes on real property.

(But the deductibility is only going to matter if you are itemizing deductions. If you aren't, it's just another expense.)

The second set of tax implications come when you decide to sell the lot:

  1. There will be (federal) capital gains tax associated with this, since it is not your primary residence. (You could try to merge the lot with yours to avoid this tax, but I have no idea how this works in your area or if it would even be worth it in the end -- seems like there would be some other trade-offs.)
  2. You may also have local capital gains taxes.
  3. Your locality may have a real estate transfer tax.
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If you have a Home Owners Association, check your covenants. It may have rules about this sort of thing.

For example, my HOA rules specifically forbid me from:

  • Buying a lot and leaving it vacant. If I buy an empty lot, I have to build a house within 1 year.

  • Things overlapping the two lots. If I bought an adjacent vacant lot, I couldn't build a monster house that spans the two lots. I also couldn't put a long driveway from lot A to lot B.

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I think the only tax you have to pay is the property tax from your city. I don't know if you can consider it an investment or not, but if you can i think it's better to treat it as an investment rather than primary residence as you'll be able to deduct any expenses related to it (maybe advertisement when you try to sell it).

unless of course your city has lower taxes for residents.

if you do decide to make it part of primary residence i am sure you can sell it later, I see people splitting their single lots and selling them all the time.

  • Thanks for the answer. How do I "consider" it an investment? Tax return? I always thought there were other taxes on investment land. – Corey Coogan Mar 10 '11 at 14:32
  • well, now that i think about it. the profits from the sale are taxed different. First 250k is tax exempt when you sell your primary residence (both lots). – Vitalik Mar 10 '11 at 14:48
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    The ability to split a single lot into two lots or to combine two lots into a single lot is typically up to the local municipality and what is true in one city or county will likely be different than in another city or county. – Alex B Mar 10 '11 at 16:40

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