Interest deduction - improved vs unimproved land (agent, loans, value)

[sbakf]

I'm very close to buying a 40 Ac parcel of land with the intent to develop a family estate. It took some effort, but have secured financing (mortgage) for the purchase of the property (@ $285K- just have to decide whether I want a 15 yr or a 30 yr note). The land has about 20 Ac of pasture and the rest is wooded. There's also a small house (built early 1900's, approx. 1,500 sq.ft.) and two barn-type structures in one corner of property. Until last year, the house was occupied by an elderly lady who had lived there for over 70 years (raising 5 children). There's county water (plus a well) and electricity to the house.

I don't plan on living (moving into) in the house. I will, however, use it as a temporary dwelling (weekend bunkhouse) while a new barn (> 6,000 sq.ft., with living quarters) is constructed in the center of the property. Once moved into the new barn/home, I will sell my current (city) home and use the proceeds to fund construction of a new family home on the property.

The value of this property lies almost entirely in the land (> 90%). I would have bought it without the house. So here's comes the question. I've read that interest paid on a land loan is not tax deductible. At least not until construction (improvement) begins - unimproved land is considered an investment. Is this land, as is, consider improved property and will the interest I pay on the loan be tax deductible from the start (i.e., before I start construction on the new structures)?????????????

Thanks for your help.

[DMenscha]

Likely not, but you should consult a tax professional because everyone's financial picture is different.

[chet everett]

I am not an expert on the particular matter you are asking about. I do know that first and second homes are generally considered fully qualified for mortgage interest deduction regardless of how large / small the lot is: Publication 936 (2008), Home Mortgage Interest Deduction

If you get fancy with your taxes you probably want a firm that has the ability to represent you in front of the IRS and the expertise to cite relavent IRS case law. That is WAY MORE that your typical "tax preparer"...

[greenstar]

Is interest paid on land loans deductible?
1st, is underground power service, city water, and phone landline considered improved ?

[MMichelle]

I noticed you posted this in Real Estate, but you are asking a tax question. No real estate agent can offer advise on this question. You need to put the question to a CPA or tax consultant.