Question

I am going to sell (house not included) 19 acres from my 21 acre primary residence. What taxes are going to be owed on the profit from this sale? I am in Texas.

Forum|Forum|4 years ago
December 7, 2021
1 reply
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I am keeping 2 acres with the house. I am simply selling the rest of the land. All was purchased as my primary residence. How will it be taxed since it is my primary residence but I'm only selling part of it? I paid $25k for the land but it was attached to the same loan with my house. I'm selling only 19 acres of it for a considerable profit. I don't think cap gains apply, but if I have to pay it like income I will owe $30k-$40k in taxes?

TurboTax Online

Critter-3

See IRS publication 523. The sale of the vacant land is eligible to be treated as part of the home, and eligible for the exclusion, if you have used it as part of the home, and if you sell the land and the house within 2 years of each other, even if the sales are to different people.

https://www.irs.gov/uac/about-publication-523

However, the publication also says "If your sale of vacant land meets all these require- ments, you must treat that sale and the sale of your home as a single transaction for tax purposes." I don't know how to do that if the sale happens in two different tax years, so you may need to see a tax professional. (If the total gain is less than your exclusion, and if there is no 1099-S issued, then the sale is not reported and it doesn't matter if the two sales occur in different years. However, if the total combined gain is more than the exclusion so that some tax is owed, or if a 1099-S is issued, and if the two sales are completed in different tax years, you will probably need a see a tax professional for help.)

If you end up owning the land more than two years after selling the house, it will be treated as a sale of land and subject to gains. You will allocate the cost basis based on the value of the house and land when you originally purchased the property. You can allocate your legal fees and expenses incurred in splitting the parcels based on acreage, which will help raise the cost basis of the land and reduce your gain. You also have the option of adding your property taxes to the cost basis rather than deducting them ("capitalize" your costs), which will lower your eventual gain (but you miss the immediate deduction.) The election to capitalize expenses must be made in writing each year with a written statement attached to your tax return.

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piclsa08Author

Thank you for the info. The sale of either or both will not surpass the exclusion. However I have not decided if or when I will sell the house and remaining two acres. I am already under contract on the 19 acres but will push closing until after Jan 1, 2022. But I don't want to pay 28% on the gains which is what the realtor is thinking it will be.

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Mike9241

and as per the IRS regs, the sale of the land is reported as fully taxable in the year of sale. if you sell your primary residence within 2 years of the sale of the land you take the exclusion on the home sale up to the maximum allowed. if the gain is less, then you go back and amend the return reporting the land sale and take any remaining exclusion up to the gain.

this is an example from the IRS regs 1.121-1

In 1991 Taxpayer C buys property consisting of a house and 10 acres that she uses as her principal residence. In May 2005 C sells 8 acres of the land and realizes a gain of $110,000. C does not sell the dwelling unit before the due date for filing C's 2005 return, therefore C is not eligible to exclude the $110,000 of gain. In March 2007 C sells the house and remaining 2 acres realizing a gain of $180,000 from the sale of the house. C may exclude the $180,000 of gain. Because the sale of the 8 acres occurred within 2 years from the date of the sale of the dwelling unit, the sale of the 8 acres is treated as a sale of the taxpayer's principal residence under paragraph (b)(3) of this section. C may file an amended return for 2005 to claim an exclusion for $70,000 ($250,000-$180,000 gain previously excluded) of the $110,000 gain from the sale of the 8 acres.