Do You Pay Taxes on Land You Own?

Owning land in the United States comes with the responsibility of paying taxes. The most consistent tax is the annual property tax, levied by local government entities such as counties, cities, and school districts. This tax applies to all land, including vacant or unimproved parcels, regardless of whether the property is generating income. While specific rules and rates vary by location, the obligation to pay property tax is a universal aspect of land ownership.

Annual Property Taxes on Land

Annual property taxes are not a federal levy; instead, they are assessed and collected at the local level by county or municipal governments. The revenue generated from these taxes funds public services that benefit the community, such as local schools, road maintenance, and police and fire departments. The tax is considered an ad valorem tax, which means it is based on the value of the property being taxed. This is a recurring expense, billed on an annual or semi-annual basis, and the obligation continues for as long as the individual or entity holds the title to the land.

How Property Taxes Are Calculated

The calculation of a property tax bill involves two components: the land’s assessed value and the local tax rate. A local government official, known as a tax assessor, determines the value of the property. This “assessed value” is an estimation of the land’s market value, which is the price it would likely sell for under normal conditions. Assessors use various methods, including analysis of recent sales of comparable properties, to arrive at this figure.

The assessed value is not always the same as the full market value. Many jurisdictions apply an assessment ratio, a percentage of the market value, to determine the taxable value of the land. For instance, if a parcel’s market value is $100,000 and the local assessment ratio is 80%, the assessed value for tax purposes would be $80,000. These assessments are performed on a cyclical basis, which can range from every year to every few years.

Once the assessed value is established, it is multiplied by the local tax rate. This rate is often expressed as a “millage rate,” where one mill is equivalent to $1 for every $1,000 of assessed value. Local governing bodies set these rates annually based on their budgetary needs. The final tax liability is calculated using the formula: (Assessed Value / 1,000) x Millage Rate = Annual Property Tax. For example, if a property has an assessed value of $50,000 and the total millage rate is 25 mills, the property tax would be $1,250 for the year.

Taxes When Selling Land

When a landowner sells their property, the profit realized from the sale is often subject to capital gains tax. This tax applies to the difference between the land’s selling price and its “cost basis.” The cost basis includes the original purchase price of the land plus certain other expenses, such as closing costs and the cost of any capital improvements made to the property. The calculation for the taxable gain is the sale price minus the cost basis. For example, if land was purchased for $50,000 and later sold for $120,000, the capital gain would be $70,000.

A factor in determining the tax rate on this gain is the holding period of the land. The IRS distinguishes between long-term and short-term capital gains. A long-term gain applies to assets held for more than one year, while a short-term gain is on assets held for one year or less. Long-term capital gains are taxed at lower rates than short-term gains, which are taxed at the individual’s ordinary income tax rate. For 2025, federal long-term capital gains tax rates are 0%, 15%, or 20%, depending on the seller’s overall taxable income.

Other Tax Scenarios for Landowners

Rental Income

If a landowner leases their property to another party, such as a farmer for agricultural use, the income generated is taxable. The IRS treats this rental income as ordinary income, meaning it is taxed at the landowner’s standard income tax rate. All payments received for the use of the land must be reported. Landowners can deduct related expenses, such as property taxes, maintenance costs, and insurance, from the rental income to reduce their tax liability.

Inheritance and Gift Taxes

Transferring land to another person can also have tax consequences. If land is passed to an heir as part of an estate, it may be subject to federal estate tax. This tax is levied on the total value of an estate, but only if the value exceeds a high exemption amount, which for 2025 is $13.99 million per individual. Gifting land during one’s lifetime can trigger a federal gift tax if the value exceeds the annual exclusion amount of $19,000 per recipient for 2025. Some states also impose their own estate or inheritance taxes, which often have lower exemption thresholds.

Special Assessments

Landowners may face a special assessment tax, which is different from their regular annual property tax. This is a one-time levy imposed by a local government to fund a specific public improvement that directly benefits a property or a group of properties within a defined area. Examples of such projects include the installation of new sewer lines, sidewalks, or streetlights. The cost of the project is apportioned among the benefiting property owners.

Potential Tax Reductions on Land

Landowners may have opportunities to lower their tax burden through various deductions and special classifications. One method is the property tax deduction on federal income taxes. Individuals who itemize their deductions can deduct the amount they paid in state and local property taxes, including those on land. This deduction is subject to the State and Local Tax (SALT) deduction limit, which is capped at $10,000 per household per year.

Another avenue for tax reduction comes from exemptions and special property classifications that can lower the land’s assessed value. For example, many jurisdictions offer an agricultural exemption for land that is actively used for farming or ranching. This valuation assesses the land based on its agricultural productivity rather than its full market value, which can result in a lower property tax bill. Landowners who place a conservation easement on their property, legally restricting its future development, may also receive property tax benefits and a potential federal income tax deduction.