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Q:
Subject: Exchange QuestionHi,I am writing from Maryland. Last year I sold a piece of land in West Virginia to purchase a primary residence in Maryland. When I originally purchased the land 6 years ago my intent was to build a primary residence on it. I had some financial troubles and deferred building the house. My personal situation changed and I needed to buy a home in Maryland closer to family and work. I ended up selling the land and used every penny as a down payment on my new house which is worth about 10 times the price of what I sold the land for. It doesn't seem fair that I have to pay capital gains tax, I never intended to keep the land as investment to make money. In addition, I paid out over $1800 in West Virginia property tax over 6 years.
Thank you,
A:
As I'm assuming your personal tax advisor has already told you, the fact that you didn't originally intend to hold that land for appreciation purposes isn't relevant. All IRS cares about is how the property was actually used and the fact that you sold it for more than you bought it for. You should have already been deducting the property taxes on Schedule A in the years in which they were paid.
It's too late now to change the consequences for you; but for future reference, as well as for others in similar circumstances, there was a way in which you could have legally avoided taxes on the land sale. I'm assuming that you didn't bother to consult with a tax pro prior to selling the land, or else this idea would have been brought up.
While a 1031 exchange directly between an investment property and a primary residence is not legal, a two step approach is frequently used in situations similar to yours. You could have used Sec. 1031 to reinvest the land proceeds into a rental house. After renting the home out for a reasonable period of time, you could then convert it into your primary residence.
I hope you have better luck next time, tax wise.
Kerry Kerstetter
Labels: 1031
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/18/2005 09:56:00 PM Send this post:
