- Tax Benefits.
You can not depreciate undeveloped property. The IRS code only allows for depreciation of the improvements on the property and the contents separately. Depending on the tax bracket you fall into this one advantage could save you a lot of money.
Vacant land does not generate income unless can you can lease it out to a farmer or for storage or as a parking lot. When you build on the property you now have created a steady revenue stream coming in even when you are not there. Depending on the type of improvement you could even make it a business and write off even more expenses.
- Net Worth.
Typically it can take a year or longer to build a home or commercial structure on a piece of land especially when you take into consideration the time it takes to get all the necessary approvals from al the local authorities. By the time you get the project finished and depending on the market you are in the property will be worth a lot more than you owe on it which will greatly increase your net worth.
- Resale Potential.
It is usually a lot easier to sell a finished product than it is a vision of what could be. This is why building spec homes has become so popular. People just don’t have the time or the desire to make all the decisions involved with a building project from scratch. This works with commercial properties a swell as community developments and multi family like condos and town homes.
If you own the land outright or have a good bit of equity you can typically borrow 100% of the cost to build from the bank. Once the project is complete you can pull the equity out of the property tax free. This is a great strategy. As the property continues to grow in value you can refinance and cash in. The best part about this strategy is you get to keep the property. You never have to pay any taxes unless you sell and then you do a 1031 exchange at that point and still avoid paying the taxes.