California Real Estate Practice Exam

For which of the following could a deduction for income tax purposes be taken when unimproved land is held for investment?

1. Depreciation

2. None of the above

3. Short-term capital gains

4. Loss on the sale of land

The correct answer is: Depreciation

When unimproved land is held for investment, a deduction for income tax purposes is not typically available for depreciation, as land itself does not depreciate. Instead, real property improvements, such as buildings and structures, can be depreciated because their value decreases over time due to wear and tear. Since unimproved land does not have a finite lifespan like a building, it cannot be depreciated. However, a deduction can be claimed for a loss on the sale of land; this can happen if the property is sold for less than its original purchase price. Such losses can qualify as capital losses, which can offset other capital gains for tax purposes. In this context, the responses related to short-term capital gains are relevant only when the property is sold for profit, while "none of the above" does not apply because losses can be deducted upon sale. Thus, while depreciation is not applicable to unimproved land, losses from the sale of that land can indeed be deducted, making the more comprehensive understanding of tax deductions more critical.