Where does the tax money come from when land is the only thing you own?

Question

I've been putting money aside toward a first parcel and got stuck on something simple. Land banking produces no income, so the property tax bill has to be paid out of something else every year for however long the hold runs. Nobody I've read seems to agree on what that something else should be.

One approach is to pay it from your paycheck and treat it like any other bill. It's usually small on raw land, and if you can't cover a few hundred to a couple thousand a year out of income, the argument goes, you probably shouldn't be tying up capital in an asset with no cash flow at all.

The second approach is to fund the carry at closing. Buy a smaller parcel and put the difference in a separate account that covers taxes and insurance for a set number of years, so the hold survives a job loss. That costs you buying power up front.

A third version I've seen is to own something that pays, a rental or a note, and let that cover the land's carry, so the two positions sit together.

And a few people buy enough acreage that they intend to sell off a piece if the carry gets heavy, which sounds fine until you're selling in a bad year.

I don't have rentals and my income is uneven, which probably narrows it for me. Curious where the room lands.

marcus_hale41 · Answer

Fund it at close, every time. The diligence I do before buying is worthless if a slow year forces the sale, and a forced sale on raw land is the worst position in this whole strategy because there's no income to point at and buyers know it. I size the reserve to the years I'd need to be wrong about timing, not to the tax bill.

luis_carrera · Answer

I've spent months modeling this exact question and the models all agree the reserve costs you acreage and the reserve is still correct. Which tells me I should stop modeling and go buy the smaller parcel. @canton's framing about years of being wrong is the version I'll use.

stephen_ok9 · Answer

Something people skip when they pre-fund the carry is that the reserve is capital sitting at a low return alongside an asset already producing nothing. So you're doubling down on zero yield. I'd rather keep the reserve invested in something liquid I can sell in two days than in cash for ten years, but that only works if you'll actually sell it for taxes instead of talking yourself out of it.

mitchell_ray4 · Answer

Trades income is lumpy the way @lantern describes, good months and dead months. My rule after a bad winter is that any bill I have to pay in a dead month comes out of money already set aside, not out of hope about spring. Land taxes go in that bucket. Everything else I've tried has cost me more than the interest I gave up.

dmitri_v6 · Answer

Whatever you decide, put the mechanics in writing somewhere, including who pays the bill and from which account, especially if you hold with anyone else. I've seen the tax question turn into a partner fight in year five because nobody wrote down whose obligation it was and one person had already paid three years out of pocket. Check with your own attorney on how the entity documents should handle capital calls for carry.

joe_delgado5 · Answer

Thin margins over here so I'll say the unpopular one. Pay it out of income and buy the bigger parcel, because the reserve is a bet against yourself and the acreage is the bet you came to make. Yes, that means a job loss in year three is a real problem. It also means when the ring shows up you own 40 instead of 26!

Where does the tax money come from when land is the only thing you own?

6 replies