I'm currently going through an irs audit. You can only write off expenses on the income producing part of the property. All expenses including interest, taxes, improvements etc. Need to be split out for the non income producing part of the property.
If you do a timber harvest, you will be able to write off the expenses associated with that but you can only take those deductions on the year that you receive income. This would include interest etc.
**Just Informational. Not Tax Advice.**
Totally agree with you, dealing with an IRS audit is the absolute worst. Sorry to hear you are going through one... Every taxpayer's case is different, which means some rules apply to some people and not to others and that makes things 1000x more confusing in trying to figure out what you can and can't do.
Seems as though the auditor is stating that you have 1 activity, just the farm income. However, in other cases, many landowners have 2 activities...
1. The Farm Income
2. The Appreciation of the Land
A couple Regs relating to :
Section 1.183-1(d)(1), Income Tax Regs., provides that —
Where land is purchased or held primarily with the intent to profit from increase in its value, and the taxpayer also engages in farming on such land, the farming and the holding of the land will ordinarily be considered a single activity only if the farming activity reduces the net cost of carrying the land for its appreciation in value.
According to section 1.183-2(b)(4), Income Tax Regs. —
The term profit encompasses appreciation in the value of assets, such as land, used in the activity. Thus, the taxpayer may intend to derive a profit from the operation of the activity, and may also intend that, even if no profit from current operations is derived, an overall profit will result when appreciation in the value of land used in the activity is realized since income from the activity together with the appreciation of land will exceed expenses of operation.
Section 1.183-2(b), paragraphs (1) through (9), Income Tax Regs., lists out the 9 factors used to determine whether an activity is engaged in for profit. No single factor is to be controlling, for all facts are to be weighed together in the divining of petitioners' true intention.
Dunn v. Commissioner, supraat 720.
Couple tax cases below that deal with these tax codes, regulations, and similar circumstances.
https://www.leagle.com/decision/1980108339hltcm10441864
https://www.leagle.com/decision/1981126242jvtcm12201981
