Does buying a vacant lot and holding it count as land banking

Question

Land banking gets used two different ways, and they describe different activities. One usage is what large homebuilders do: optioning lots from a third party who holds them so the lots do not sit on the builder's own balance sheet. The other usage is simply buying raw land and waiting for it to appreciate. On the tax point, vacant land is not exempt from property tax just because there is no structure on it, though assessed value and the applicable rate can differ from an improved parcel depending on the jurisdiction. Buying a five acre piece with nothing on it and holding it untouched for eight years is generally just called land banking in the personal sense, and the ongoing cost is property tax each year plus whatever carrying costs come with it, rather than the institutional homebuilder version of the term.

Rena Guide · Accepted Answer

Strictly, land banking means buying raw undeveloped land, making no improvements to it, collecting no income from it, and holding it for years on the expectation that development and population growth reach it and lift the value. That's your five acres held for eight years. In this room, that's what the term means.

The builder arrangement you read about is a different thing that borrowed the name. There, a capital partner takes title to finished or nearly finished lots and the builder holds an option to buy them back over time, paying for the privilege. That's a financing structure with income built in for the holder. Public land banks are a third meaning, where a city or county holds tax-foreclosed property to return it to use.

On taxes, vacant land is assessed and taxed. The bill is usually smaller than on an improved property because there's no building in the assessed value, and in agricultural states a qualifying use can reduce it a great deal more. It isn't zero, and it tends to rise as the surrounding area develops, which is the same trend you're betting on.

The part that surprises people is what you cannot do with land at tax time. There's no depreciation deduction, because land isn't a wasting asset, and how the property taxes and any interest get treated depends on your situation, so that's a question for a tax professional in your state.

Budget for the tax bill, any mowing or brush clearing the county requires, and the fact that nothing comes back in until you sell.

raj_mehta14 · Answer

The builder version and your version share a name and almost nothing else. The builder one is a financing structure with an option contract and a fee, and there is a capital partner earning that fee. Yours is simply owning dirt and waiting.

brandonlee36 · Answer

You will definitely get a tax bill. Vacant land is assessed like any other parcel, the assessed value is simply lower because there is no improvement on it. What you do not get is depreciation, since land is not a depreciable asset.

nicole_adeyemi · Answer

There is a third use of the phrase that trips people up. Some cities and counties run public "land banks" that take title to tax foreclosed and abandoned property to get it back into use. That is a totally different animal from a private investor holding acreage, and a search on the term will return a lot of those results.

karen_whitfield · Answer

Eight years is a short hold for this. I'd plan on the possibility of fifteen and be pleasantly surprised. The parcels that move in eight are usually the ones where development was already visible from the property line when you bought.

tonyv88 · Answer

On five acres, ask the county whether there is a weed or brush ordinance before you assume the annual cost is only taxes. Abatement notices have a way of turning into a bill the owner did not budget for, plus a lien if it is ignored.

jessreyes12 · Answer

What I never understood: if you make no improvements, what exactly makes it worth more later? Somebody else building nearby? That's the whole bet?

nataliehsu · Answer

@jessreyes12 yes, roughly. Growth arrives, the land in front of it gets rezoned or absorbed, and demand shows up for parcels that used to be too far out. If growth turns the other direction you're holding the same field you bought.

omar_haddad · Answer

Coming from the renovation side, the thing I find hard about this is that there's no lever. On a rehab I can add value with a decision. Here you buy correctly once and then you have no further input for a decade.

wendy_park48 · Answer

Read the deed and the title commitment before you get attached. Mineral rights severed decades ago, a utility easement across the buildable middle, an access strip that isn't actually recorded. Those show up constantly on raw parcels and they all affect what a future buyer will pay.

sonia_alvarez · Answer

Also worth knowing before you plan the purchase: raw land financing is its own category. Lenders that do it typically want much more down than they would on a house and amortize over a shorter term, and the terms move around, so get an actual quote in writing rather than assuming a mortgage-like structure.

Does buying a vacant lot and holding it count as land banking

13 replies