Q:

Subject: Vacant Land Sale Question

Hi.  I am hoping you can answer my question.  We bought out house in June 04, it has two parcels...one the primary residence sits on, the other is an adjoining lot.  We are selling the lot for 150K.  Are the proceeds subject to taxation, if so, how much?  Any help would be appreciated.  Thank you!

A:

It depends on a couple of things. 

What was the lot used for?  If it was an extension of your living space, it could qualify for the tax free exclusion, as long as you sell the actual residence portion within two years of selling the lot.

I covered this on my website under the topic of  "Vacant Land."


If it wasn't used as part of your living space, it will not qualify for the primary residence tax free exclusion.  However, if you have been classifying the lot as "investment property" it could be disposed of under Section 1031, which would require you to follow all of its rules, as described at www.tfec.com.

Your personal tax advisor should be able to give you more specifics for your unique situation.

Good luck.

Kerry Kerstetter

 

Follow-Up Q:

I really appreciate your prompt response.  Nice to know someone cares out there!  Just to clarify, if I sell the lot (which is part of our primary living space), we would absolutely have to sell our main home within two years or face taxes retroactively on the vacant land sale?  Thanks again.

 

 Regards,

A:

There's actually another twist to your situation as well, which is why you really need to be working one on one with a tax pro.

Assuming that you moved into the home in June 2004 and didn't just buy it then, you need to be concerned about the two year rule.  If you sell your home before the two year anniversary of occupying it, you will need to have a valid reason (health, employment, or other unforeseen event) in order to qualify for the pro-rated exclusion.  If you have no such reason, you will have to pay taxes on both portions of your sale, the lot and the home.

However, if you sell the home after June 2006 and before the two year anniversary of the lot sale, you should be okay.

One more warning. The issue of selling the lot before the two year anniversary of its purchase is in the infamous gray area of tax law.  Some people think that would automatically disqualify it from the tax free exclusion, unless it is due to the unforeseen circumstances; while others believe the date of the sale of the main home dictates the treatment of both portions of the sale. 

All of this discussion assumes that there will be a large profit on the sale of the lot to be concerned with.  Your original
question was unclear on how the lot was acquired.  If it was bought in a separate transaction from the home purchase, you will have to use that price as its cost basis.  However, if it was lumped in with the home purchase, you have some flexibility in allocating the purchase price between the two portions, as long as no such allocation was specified in your purchase contract. 

I have had several cases similar to this, where a client has spun off some land shortly after purchasing a large parcel.  Since the sales took place shortly after the purchases, I had no qualms about allocating the same amount as the sales prices as the cost bases of those particular parcels.  This gave them a break-even on the sale, or a loss after deducting selling costs.  That is something you may want to look into when you discuss your particular situation with your own personal tax advisor.

Good luck.

Kerry Kerstetter

Labels: 1031

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 7/31/2005 02:15:00 PM Send this post: