What Is Land? Definition in Business, Valuation, and Main Uses

What Is Land?

Land, in the business sense, can refer to real estate or property, minus buildings and equipment, which is designated by fixed spatial boundaries. Land ownership might offer the titleholder the right to any natural resources that exist within the boundaries of their land.

Traditional economics says that land is a factor of production, along with capital and labor. The sale of land results in a capital gain or loss. Under Internal Revenue Service (IRS) tax laws, land is not a depreciable asset and qualifies as a fixed asset instead of a current asset.

Understanding Land

In Terms of Production

The basic concept of land is that it is a specific piece of earth, a property with clearly delineated boundaries, that has an owner. You can view the concept of land in different ways, depending on its context, and the circumstances under which it's being analyzed.

In Economics

Legally and economically, a piece of land is a factor in some form of production, and although the land is not consumed during this production, no other production—food, for example—would be possible without it. Therefore, we may consider land as a resource with no cost of production. Despite the fact that people can always change the land use to be less or more profitable, we cannot increase its supply.

Characteristics of Land and Land Ownership

Land as a Natural Asset

Land can include anything that's on the ground, which means that buildings, trees, and water that are a part of land are an asset. The term land encompasses all physical elements, bestowed by nature, to a specific area or piece of property—the environment, fields, forests, minerals, climate, animals, and bodies or sources of water.

A landowner may be entitled to a wealth of natural resources on their property, including plants, human and animal life, soil, minerals, geographical location, electromagnetic features, and geophysical occurrences. 

Because natural gas and oil in the United States are being depleted, the land that contains these resources is of great value. In many cases, drilling and oil companies pay landowners substantial sums of money for the right to use their land to access such natural resources, particularly if the land is rich in a specific resource.

Among the Oldest Types of Collateral

Lenders are extremely attracted to land because it is one of the oldest forms of collateral. But unlike a home or a car, for example, land cannot be moved, stolen, or destroyed. Air and space rights—both above and below a property—also are included in the term "land;" however, the right to use the air and space above land may be subject to height limitations dictated by local ordinances, as well as state and federal laws.

Investing in Land for Development

Land's main economic benefit is its scarcity. Many investors who purchase land do so with the intent of developing it, often for commercial or residential real estate developments that are subject to zoning ordinances.

Investing in raw land can produce significant future cash flows that are easy to predict once secured, but developing land can be very costly and uncertain. The associated risks of developing land can stem from taxation, regulatory usage restrictions, leasing and selling a property, and even natural disasters.