How Non-Depreciating a Land Property Could Actually Be
Many investors get into land because they know that the land will always hold some value. Whether this value goes up or down depends on the markets, but land cannot depreciate. It is actually classified as a non-depreciating asset.
What does this mean?
Imagine you purchased a rental home and have successfully allowed tenants to rent the home for years. Perhaps there has not been any repair work needed over the last 10 years. But, within this time span, your home has aged, and its price may have depreciated as a result. This occurs when the price goes down on the value of the home. There’s a complex system the IRS uses to determine depreciation for real estate.
For investors, it’s important to depreciate the value of any structures or buildings on the property. Capital expenditures on the property can also be written down. For example, if the land has a building, you could depreciate the following:
* Remodels done to the home.
* New windows.
* Appliances and furnaces.
* Legal fees.
What all of this does is reduce your tax requirements on the property due to depreciation. This is a good thing for investors because it lowers the amount of money they must pay the government, but it also comes at a cost because all of these depreciated values will have some monetary value attached.
Land is not a depreciable asset. You will not be able to take a deduction on the land that was present before any buildings or improvements were put in place. As an investor, you will not be able to depreciate the value of land, but you could write off costs for tending to the land or hiring contractors to prepare the land, for example. In the strict accounting sense, land can never depreciate in value.
Land can never be worn out or become obsolete. There is no usable life determination present with land. You can pass the land off to family members time and time again for centuries and it will still serve its purpose. Any upgrades to the land, such as plumbing or electrical connectivity, might be considered a depreciable asset because it may need to be repaired over time and decline in value. If the land value has dropped and you want to sell it anyway, you do have the ability to write off a loss. For example,
* You purchased a piece of property for $10,000.
* You sold the same property for $5,000 at a loss.
At the end of the year, you can claim the $5,000 as a capital loss after selling. This is something that needs to be considered because land value can go down, but it's not often that a piece of land's price goes down as much as other investment products, such as stocks.
Land Values That Decline
The real question is can land values decline? And the answer is: yes. Land values can decline. A good example of this is what we’re seeing in Iowa at the moment. Land values, specifically farmland, have dropped in the state by 4% in the past six months.
This is a massive drop, but it is a drop that farmland is witnessing across the country. In the Midwest, however, farmland and ranchland increased 32.7 to 35.5 on the price index between August and September. Farmland is having a rough season, with land prices declining at 6% to 7% annually. Despite the recent declines, between 2014 and 2015, farmland prices increased by 2.4 %.
Farmland is becoming less valuable for variety of reasons. This is due to mass farming practices, fewer people being interested in being in the farming industry, and the high costs of starting a farming operation at the time. Uncharacteristic weather is also causing prices to decline due to uncertainty and growth cycles.
But, don’t let this deter you from farmland – it can be very profitable as you’ll see in a minute. What I want to point out about farmland is that while it’s down, residential land and commercial land do not see these massive fluctuations that farmland is currently experiencing unless the area takes a big downswing, such as Detroit.
To demonstrate this point, I want to provide you with statistics from the USDA for farmland prices:
* In Arizona, the average value per acre of land in 2011 was $7,600, and in 2015, the land was valued at $8,320.
* Irrigated cropland in California has seen its price increase from $11,100 in 2011 to $12,700 in 2015.
Taking a look at pasture land, you’ll notice that some land has depreciated over the last four years. This is normally due to the lack of a city center nearby and people wanting to live closer to cities. Let’s take a look at land that has depreciated in value during this time:
* In New Jersey, the average acre of pastureland was $14,000 in 2011, and is now $13,500 in 2015.
* Nebraska is a great example of how land values fluctuate. Prices in 2011 were $503 per acre. This figure has climbed dramatically to $870 an acre, but prices were $900 an acre in 2014. So while the prices have fluctuated, this would still be a great investment as you would’ve seen more than a 50% return.
*Minnesota is a great example of how fast prices can increase. Prices start at $1,320 in 2011, rose to $1,600 in 2014, and has since risen 18% on the year up to $1,900 an acre.
The moral of the story is that land is an asset that is much like gold. The price will go up and down, but you’ll always have value in land. As the world’s economy continues to grow, land will see its value skyrocket even further unless population measures are taken.
As you’ve seen from the data, the values may go up and down, but land still appreciates in value in the long-term – this is what you want for your retirement. With land, you’ll find a lot of great properties with acreage that are in the middle of nowhere. You want to stay closer to cities or developing areas to safeguard your investment due to a higher potential of growth in the area.
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