Land sale capital gain ?

Question

Not sure if I’m posting in the correct spot but I have a question on selling some raw land.

We own 119 acres.We started with 40,than bought neighboring properties of another 45,18 etc for the total of 119.It all joins together.

We have no structures on it and know we will have capital gains if we sell it and don’t do a 1031.

We have talked about building a small cabin and living in it a few years and than selling it all or keeping the cabin and 34 acres and selling the 85 acres that’s left to hopefully avoid some capital gains.

How does that work on selling 85 and keeping the cabin and 34 acres in regards to capital gains.

We have 85-100000 invested in the 85 and could get 400-50000.

Thanks

Michael Plaks · Answer

There are at least 4 different issues in your question, and it's best to look at them separately.

1. Calculation of capital gains when you sell a portion of a bigger land tract.

You will need to allocate your dollar investment (aka tax basis) between the portion sold and the portion kept. There're different ways to allocate it, as mentioned by @Dave Foster on this thread. It will be up to your CPA to choose the most sensible and most beneficial allocation.

You will need an allocation whether you sell the land outright or execute a 1031 exchange.

2. Avoiding capital gains by moving into a property.

Section 121 of the tax law which controls tax exclusion for sales of homestead was specifically written to prevent this strategy. Otherwise everybody could move into an appreciated property - whether vacant land or a building - for 2 years and defeat capital gains.

If you move into a property for 2 years and then sell it, you can exclude only a portion of your capital gains, as @Bill B. illustrated.

3. Can vacant land adjacent to your home be considered part of your home?

There is no clear guidance on this, and specifically on the size of land that can qualify. Courts resolve these situations differently, case by case.

If the land is not considered a part of your residence (and I doubt that all 119 acres could qualify) - then the next issue is already dead.

4. Can you use the homestead exclusion on a partial land sale?

Again, this requires that the land is considered part of your homestead, and it is far from certain. If it is - then an exclusion is only available if you sell the rest of the property within 2 years.

Dave Foster · Answer

@Quinton B., think of it like buying a company's stock at various times.  Your price per share is different each time.   But your brokerage will tell you the average price per share you have spent.  That would be the reasonable basis of the assembled parcel (unless you kept all of your purchases separate and sold them the same way you bought them).

If you have already been using that land for investment purchases - share cropping, logging, hunting, etc then you will need to convert a portion of that from investment to your primary.  If you want to get rid of some tax that way.  But a conversion from investment to primary will not get you out of all of the tax on that primary sale.  You'll have to prorate over the number of years you lived in it and the number of years it was investment (the land portion)

If you have not been using it as investment you could take a chunk and build a house on it.  And that could be your primary.  There is no specification of how much of that land you can claim as your primary.  It will all come down to the facts and circumstances of how much of the land can truly be considered part of the actual homestead.

It's not a cut and dried situation.  You need an accountant.  But between a primary exemption and a 1031 you should be able to get rid of all tax.

Ashish Acharya · Answer

@Quinton B.I generally agree with Dave here. The big thing to understand is that taxes are based on how the land is allocated, not how you think of it as one property.

From a tax perspective, Quinton, you can sell the 85 acres and keep the 34 with the cabin, but you don’t avoid capital gains. You allocate your original basis across all 119 acres, usually by acreage or value. The portion tied to the 85 acres reduces the gain, and the rest is taxable long-term capital gain.

Building a cabin and living there only helps for the house and the land reasonably associated with it. The home sale exclusion does not apply to all the acreage. Excess land is still taxable when sold.

This can work, but the basis allocation and timing matter. Definitely something to plan before selling, not after.

Good luck, and happy to connect.

Quinton B. · Answer

Thanks for all the advise!

Bill B. · Answer

Dave foster brought up the point I was going to say will probably sink your deal.

Let’s assume you’ve owned some of this land for 10 years. You build a home on it and live there for 2 years and then sell your “primary “ home.  BEST case is you can claim 2 out of the 12 years, or 16.7% of the gain as tax free.

Capital gains tax is usually only 15%. So you’re doing this work to save less than 17% of 15% (less than 3%) in taxes on the gains on the land they allow you to call your primary home. (The highest “safe harbor” I could find is 29 acres. But you might not increase your sale price much above 5-10 acres depending on buyer.).

I assume you have hundreds of thousands in gains (10’s of thousands in taxes) to even consider this. If so, talk to your CPA BEFORE you do this. Unless you dream of living there the juice might not be worth the squeeze. Pay the taxes or do a 1031 exchange age. Otherwise enjoy the hobby farm/ranch life.

Quinton B. · Answer

So if I build a structure and live there 3 years I still have to pay capital gains if I sale the 85 acres?

How do I get away from having to pay capital gains,live there and sale it all?

Denise Supplee · Answer

Capital gains will be calculated based on the allocated cost basis of the 85 acres you sell, not the entire 119, so a survey and clear basis allocation are key. Building and occupying a cabin may help for the portion you keep, but it won’t automatically shield gains on the land you sell. Before moving dirt, it’s worth talking with a CPA about basis allocation, timing, and whether a partial 1031 or installment sale could reduce the tax hit.

Jason Malabute · Answer

When a single property is split and only part of it is sold, the original purchase cost has to be allocated between the portion sold and the portion kept. Capital gains are then calculated only on the portion that is sold, based on the allocated cost basis for that part compared to the sale price.

Land sale capital gain ?

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