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Q:

I was wondering about the tax on a land sale.  I own 10 acres which I currently live on.  If I sell all the land except for the parcel that my home sits on, what would my tax be considered?  LTCG or income tax?

 

Thanks for any help.

A:

There are a number of issues to consider here.

As I explain on my website, if you also sell your house within two years of selling the surrounding land, you may be able to consider the land sale as part of the residence sale, which could have up to $250,000 of tax free profit.  This would only apply if you weren’t using the land for business or rental purposes.

If you are not going to sell your home, you are looking at a taxable event with the land sale, assuming you are selling for more than you paid for it.  If you bought the property as one single transaction, you will need to allocate your cost basis between the land being sold and the house and land you are keeping.

You didn’t say how long you have owned this property.  If you have a gain, it will be taxed at the special long term capital gain rate (5% or 15% Federal) if you have owned it more than 12 months.  If you are selling after less than 12 months of ownership, it will be taxed at ordinary income tax rates (up to 35% for Federal).  State tax will be additional, unless you live in a state with no income tax.

If you will be selling for a loss, there will not be any deduction allowed if the property was only used as part of your personal residence.  The tax law is very unfair in this regard; but that’s how it is.

For more details on how this will affect your taxes, you should consult with a tax pro where you can work with actual numbers.

Good luck.

Kerry Kerstetter

What Is Due to Expire Taxwise – It’s not bad enough having to know all of the new laws.  We have to keep up on which existing ones are expiring at all different dates.

In North Carolina

There has never been a shortage of misinterpretations of tax law, such as in this question we received the other day.

Help me with this one.
 
I understand that a vacation property can be classified as a second home.  By this I mean that it actually qualifies for tax exemption as your residence when you sell it. 
 
Is it possible to do a tax free exchange from a duplex to a condo and then sell this after a period of time, like five years, as a second home per my understanding above?
 
The duplex is pure rental property.  The condo will be used by us and rented by a property manager when we are not using it.

My Reply:

You are correct that a vacation home can be considered as a second personal residence, which allows you to deduct its mortgage interest and property taxes on Schedule A.

You are wrong, however, in regard to the tax free exclusion of gain.  That is only available for the sales of primary residences.  Second homes have no tax free sale treatment.  Any gain is taxable, and any loss is not deductible. 

You can see the rules for tax free sales of primary residences at:
 www.taxguru.org/re/primary.htm

I hope this clears this matter up for you.

Kerry Kerstetter

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