Capital Gains On Bare Property
Hi, this is my first message, so I hope some of the experts out there can help me. I currently own 5 acres with a residential home on it. I will be splitting the property this year and selling off 2 acres of bare land. I know this sale is not exempt from the capital gains, but are there ways to get around it?
Is hunting allowed on your land. I would like to hunt a big moose or some bares. I just had to make a pun. There are some tax savings and deferral available for selling your personal residence but I do not know about selling part of it. I would think not?
Good LUCK and Thank You
Hope this helps some
Ted Jr
The home sale exclusion may include gain from the sale of vacant land that has been used as part of the residence, if the land sale occurs within two years before or after the sale of the residence.
If you don't need the cash from the sale right away you might be able to defer the capital gain if you converted your bare land to business purposes after you subdivide (i.e. rent to campers, etc). You might then be eligible for a 1031 tax deferred exchange to acquire another property (say a rental). You might run this by an RE attorney or qualified intermediary for exchanges. An intermediary told me that I did not have to hold a property very long before exchanging it. Just a thought.
Ok, I read the 1031 rule that was posted by Larry Mayer and it is my understanding that I have to use the entire proceeds of the sale from the bare property to purchase, let's say a rental. If I receive $200,000 from the sale of this property, can I:
1. Calculate the original price that this bare property would have cost at the time of purchase and subtract it from the sale price to lower the capital gains? And how would I do that?
2. Is there anyway to use some of the sale proceeds to pay off my existing house and use the remainder to put down payment on a rental of the same value or greater than the sales price without Uncle Sam imposing capital gains tax?
thanx for your help
I don't know which response by Larry Mayer you are referring to, but I suspect you are taking his response out of context to apply it to your situation.
Because your property is part of your personal residence, it is not eligible to participate in a 1031 exchange. Property used for the production of income is eligible to participate in a 1031 exchange. That was the gist of the response you received from edmeyer.
Otherwise, if you sell your primary residence within two years of selling your 2 acre partition, then you can still use the capital gains exclusion.
So, to calculate your capital gains on the sale of your 2 acre partition, you follow the algorithm you posed in your first question: Calculate the original price that this bare property would have cost at the time of purchase and subtract it from the sale price to determine your taxable profit.
To do this, look at your county tax assessment. Your tax assessment notice should tell you how much of your total assessed value is allocated to the land, and how much is allocated to the building. Multiply the ratio of the land assessment to the total assessment by your original purchase price. The answer is the original value of the land. Now if you are only selling 2 of your 5 acres, then 40% of the original land value is your cost basis for this 2 acres.
Unless you also sell your primary residence or convert the partitioned property to an income producing property, your sale profit is a taxable capital gain. You are free to use your after tax proceeds any way you want.