I received the following email:
Hi, you seem to know what you are talking about and I keep getting different opinions, so is there any way I do not have to pay long term capital gains on the following situation:
I bought 36 acres, w/house, barn,workshop, in 1983 for $165,000. We have probably put $50,000 into it over the last 20 years. We sold 15 acres of it in March. for $225,000. We are now selling the remaining acreage and house for $650,000. This closes in 30 days. Total $875,000. I think we can take the $500,000 deduction plus the amount we paid on the house, plus improvements. Is there anything we can do to keep from paying capital gains on the remainder? Does the 15 acres sold in March go; with the primary residence since it was originally bought together?
I would love to get your help !!!!
Thanks,
My Reply:
I’m assuming that none of the acreage was used for farming or other business activities for more than three years out of the five years prior to the sale. If it was, you would need to do a 1031 exchange on that portion of the property sold.
IRS allows primary residences that include acreage to be sold in multiple transactions and counted as the sale of the same primary residence, as long as all portions are sold within two years of each other. In your case, as long as you sell the second portion by March 2006, you’re okay.
Using rough numbers, it sounds as if your basis in the property as a whole is $215,000 (165 + 50). With a combined selling price of $875,000, you have a net profit of $660,000. The tax free exclusion for a married couple is $500,000; so the additional $160,000 would be taxable as long term capital gain.
I really doubt if your profit will be that much, unless you are selling the place on your own with no expenses. Selling costs, such as inspections, Realtor commissions, transfer taxes, repairs and escrow fees, reduce your profit.
If your expenses for both transactions are less than $160,000 in total, I would advise doing a little more reflection on the cost of all the improvements you made to the property over the past 20 years. Unless you’ve been keeping a tight set of books, most people short-change themselves when figuring up how much they have invested into their home. The best way to do this is to get a pad of paper, pull out your old photos and start jotting down each of the things you did to your home from the very beginning, along with your best recollection of what it cost. IRS will accept this kind of reconstruction of costs, as long as they sound reasonable. For example, if you built a deck 10 years ago, you need to use the lumber and contractor costs from back then; not today’s prices. The one thing you cannot include is your own time (aka sweat equity). You can only include what you paid other people.
Good luck. I hope this helps.
I have added the info on selling a residence in multiple transactions to the page on primary residence sales on my main website.
