I'll try to address some of the points brought up by various TBNers:
I'm all for real estate investments because of the economic benefits. Such investments don't give you any special tax benefits, other than capital gains rates in the future, or medium 25% rates on gain cause by depreciation. On an ongoing basis, deductions seldom vary much from cash outlay. That is NOT a tax shelter. Paying out $1,000 to save $300 in taxes is not smart, unless the deal is economically feasible otherwise.
If we are talking about raw land, not used in a trade or business (such as a farm), then even the cash expenses get limited. Interest on such raw land is deductible only to the extent you have investment income. Taxes are deductible if you itemize and if you do not have an alternative minimum tax problem. Other related expenses, such as mowing, insurance, etc. are deductible as miscellaneous itemized deductions, reduced by 2% of your total income, and this is only assuming you do not have an alternative minimum tax problem.
There is an election available, which I use frequently, whereby taxes and carrying costs related to unimproved, unproductive real estate can be capitalized (added to the cost basis of the land, thereby reducing future gain). I take advantage of this election when the deductions would otherwise be wasted due to the limitations and the AMT. As for the interest, any disallowed amount carries forward indefinitely until you have sufficient investment income to deduct it.
Suppose you are going to develop the land (subdivide), and you take the necessary steps to replat it, spend some legal fees etc. This makes it a trade or business. However, once you become a developer, you lose the benefit of the capital gains rates. All gains for future sales are taxed at ordinary rates. In these situations I have had clients who sat on land for years and had lots of appreciation in it, then decided to develop it. Had they just developed it and sold the lots, ALL of the gains would have been ordinary. We had them form a corporation and sell the land to the corp on an installment basis. The corp was a developer, but the shareholder received capital gains treatment for the sale of the land to the wholly owned corp. The corp pays has profits only to the extent the sales proceeds exceed the price it paid the shareholder for the land, and the development costs. Most of the profits were paid out as reasonable salary to avoid double taxation.
If you farm the land, you get the best of both worlds. You deduct the costs associated with it as farm expenses, but if you sell it after a year at gain, you can take advantage of the capital gains rates. As long as you can show that the land is used in the farm, this is the way to go. But you can't run one cow on 100 acres and call it a farm.
If you rent the land out, it gets more complicated, but in all cases you can deduct the expenses to the extent of rent income, and excess expenses are usually an itemized deduction as though the land is investment property. Passive activity loss limitations can come into play.
If you sell property, simplly replacing it with another does not generally defer the reportable gain. However there is a provision under section 1031, whereby if the title company keeps the proceeds from the sale and you identify and close on replacement property within a specified period of time, you can defer the gain from the first to the second. This is a great deal, but you must not see the cash, and you must end up with at least as much equity in the replacement property as you had in the one you gave up.
You can't take depreciaion on land. But if you purchase improved real estate and rent it out, you can take depreciation on the improvements. For the most part, you are limited to 27.5 years for residential and 39 years for commercial - all straight line. You can't take the section 179 deduction on real estate, but if you purchase equipment like a tractor connected to the rental of real estate (but not residential), and the rentals are considered a trade or business, then you can take advantage of section 179. An example of a rental that would NOT be considered a trade or business is the rental of land to a farmer, or a triple net lease, where you have virtually no expenses and don't have to do anything. If you have a shopping center and purchase a tractor, then you can utilize section 179.
The $25K available loss I was referring to is available for real estate rentals that you actively manage. This rule was put in the law mostly for taxpayers who own a rent house or two. This benefit phases out by 50% once your total income (adjusted gross income) reaches $100K, and is no longer available at all at total income over $150K.
If I was the world authority on making investments - real estate or otherwise, I would be rich, which I'm not. So take these points for what they are worth.
