Land Equity: Future Use Investment Strategy

Land held for future use is considered a long-term asset or fixed asset. This is because it is a long-term, tangible asset that a company owns and expects to use for an extended time, typically beyond one accounting year. It is not expected to lose its value over time and is not subject to depreciation. Land is also not expected to be converted to cash within a year, which is a defining characteristic of current assets. As such, land held for future use is considered an equity investment.

Land as a fixed asset

Land is a fixed asset because it is a long-term, tangible asset that a company owns and expects to use for an extended time. Fixed assets are items a company uses over the long term to help generate income. They are also known as property, plant, and equipment (PP&E).

Land is not a current asset because it is not liquid for the business and is not expected to be converted into cash within a year. Current assets are short-term resources that a business requires to run on a daily basis. They are also known as liquid assets.

The classification of assets is crucial in accounting and finance. It helps firms and individuals understand their resources. It is also important for creating an accurate balance sheet.

For companies that buy land for long-term development or those that acquire land as an investment, the distinction between fixed and current assets is especially pertinent. Land is a fixed asset with a long useful life that provides value for more than a year. It is not subject to depreciation because it is not expected to lose its value over time.

However, improvements made to the land, such as buildings or infrastructure, may be subject to depreciation. Land is a significant asset for businesses, and recording it on the balance sheet is crucial as it helps determine the company's net worth and financial position. Land has a huge upfront cost but also serves as collateral for future funding.

Long-term investment

Land held for future use is considered a long-term investment and is classified as a fixed asset on a company's balance sheet. This is because land is a long-term, tangible asset that a company owns and expects to use for an extended period. It is not subject to depreciation as it is not expected to lose its value over time.

Fixed assets are physical or intangible assets that a business purchases as long-term investments and not for resale. These assets are integral to a business's operations and can help generate revenue for several years. Other examples of fixed assets include buildings, machinery, equipment, and furniture.

Land is particularly attractive as a long-term investment because it is a finite resource. Its market value tends to increase over time due to factors such as population growth, rising demand, and limited availability. This makes land a stable and profitable investment option.

Additionally, land can provide a sense of security and stability to investors as its value is immune to market instability and can act as an effective hedge against inflation. It also offers diversification benefits, helping to balance investment portfolios and mitigate risks associated with other asset classes.

For small businesses, owning land can bring advantages such as potential long-term appreciation, tax benefits, and a source of income through leasing, farming, or development. However, there are also disadvantages, including limited liquidity, high upfront costs, and the impact of natural disasters.

Overall, land held for future use is a strategic long-term investment that can contribute to a company's growth and overall net worth. It is a key component of a company's asset portfolio and is highly regarded by investors due to its stability and potential for appreciation.

Tax benefits

Land is a long-term asset, and as such, it is considered a fixed asset on a business's balance sheet. As a fixed asset, land is not subject to depreciation, meaning that its cost cannot be gradually reduced over its useful lifespan. Instead, land is expected to appreciate in value over time, making it a wise long-term investment option.

When it comes to tax benefits, there are several deductions available for land investments, especially if the land is being held for future use as equity investment. Here are some key points to consider:

• Tax Deductions for Investors vs. Dealers: For tax purposes, there are two types of landowners: investors and real estate dealers. Investors purchase land with the intention of holding it for an extended period, hoping for appreciation in value. Dealers, on the other hand, are in the business of buying and selling land, often subdividing large tracts and reselling them piecemeal. Investors are not entitled to business deductions like dealers but can deduct many investment expenses as personal itemized deductions on Schedule A. These deductions can result in tax benefits at the regular income tax rate.
• Deducting Interest Expenses: If you borrow money to buy land for investment purposes, the interest you pay is considered investment interest and may be deductible, subject to certain limits. Generally, the deduction for investment interest expense is limited to your net investment income. Any excess can be carried over to future years.
• Deducting Property Taxes: Property taxes paid on vacant land can be deducted as personal itemized deductions on Schedule A. Unlike deductions for a main or second home, there is no annual limit on the amount you can deduct for investment property.
• Capitalizing Costs: If you don't itemize your deductions, you can elect to add expenses such as property taxes and interest to the land's cost basis, reducing any taxable profit when you sell the property. This is known as capitalizing your costs.
• Land Improvements: Improvements to the land, such as the addition of buildings, roadways, or parking lots, can be capitalized and may fall under Code Section 266. While improvements add value to the property, they can also result in higher property tax assessments. It is important to understand the potential tax impact of any improvements made to the land.
• Maintenance and Carrying Costs: Maintenance costs, such as mowing the grass and trimming trees, are considered expenses rather than capital costs since they do not improve the land. These expenses can be declared on the investor's tax return and may provide tax benefits.

Natural resources

There are several reasons why natural resources are an attractive investment option:

• Rising incomes in developing countries lead to increased demand for precious metals, building materials, and other natural resources.
• Developing countries are also in need of materials for building roads and other public works, creating a high demand for gravel, lumber, steel, and other raw materials.
• Regular updates and repairs of infrastructure in developed nations also require the use of natural resources.
• Political buying: governments are buying up natural resources to ensure a consistent supply of crucial raw materials, driving demand.
• Store of value: many natural resources, particularly metals, act as a store of value, becoming more attractive during inflation.

There are several ways to invest in natural resources:

• Direct investment: buying a resource directly. This works well for smaller investments in precious metals but is impractical for resources that require large storage facilities, like timber and natural gas.
• Futures and options: a contract-based approach that allows investors to leverage their dollars in a shorter time frame.
• Exchange-Traded Funds (ETFs): natural resource ETFs provide broad market exposure with just a few investments.
• Stocks: buying natural resource company shares directly, such as mining stocks, forestry stocks, and oil exploration stocks.

Limited usefulness

Land held for future use is considered a long-term asset or fixed asset on a company's balance sheet. It is not expected to be converted to cash within a year and is typically not subject to depreciation as it is not expected to lose its value over time. However, one of the disadvantages of owning land for small businesses is its limited usefulness.

Land has limited service because it can only be used for specific purposes. This restricted utility can make it challenging for small businesses to profit from their investment in the short term. Zoning restrictions or land-use regulations may further limit land use, impacting its potential profitability. For example, land designated for commercial use, such as office buildings or retail spaces, may be subject to specific zoning laws that restrict its potential for other types of development.

Additionally, land held for future use may have limited liquidity, making it difficult to convert into cash, especially in the short term. The sale of land can be time-consuming, and there may be associated costs, such as real estate commissions and legal fees. This limited liquidity can be a disadvantage for small businesses that need to access cash quickly to cover short-term expenses or capital expenditures.

Furthermore, land acquisition often involves high upfront costs, including the purchase price, registration fees, and legal expenses. Developing the land by constructing buildings or infrastructure can also require significant capital expenditures, which may take several years for a small business to recoup. These high initial costs can impact a small business's profits, particularly in the short term.

While land can be a valuable long-term investment, its limited usefulness in the short term may make it challenging for small businesses to realise a profit immediately.

Frequently asked questions