Capital Gains?
My inlaws currently have a SFH on a 3 acre parcel that they have owned for 28 years. (their primary) Approximate value $240K. --- $60k basis. They also own a 78 acre parcel- ($78k basis) - separate deed - which borders their primary that a developer would like a option on. The selling price would be $858K. If they annex the two parcels together an get the developer to go for $1.1m. Would the $500k combined exemption along with a basis of $138k ---Total $638k be the correct exemtion from the $1.1m? Leaving a taxable gain on $462k.
The dev. is looking for a two year option..
Sorry I should have said they would be looking to close on the option only after the two year period.
Well, if the developer waited the full two years to exercise their option, then I would think it could work as you describe.
But typically, an option can be exercised at anytime the buyer chooses, as long as it’s before the expiration date.
Again, I think they should seek the counsel of a qualified CPA.
Typically the IRS allows only about 10 acres to be included with the primary residence when the capital gains exclusion is calculated.
When the transaction as you describe it is "stepped" back during an audit, the IRS will just say that your inlaws had no real investment or business purpose other than tax avoidance for their strategy. In this instance, the IRS will unravel the consolidation and recompute the taxes as if two separate transactions occurred -- the sale of a primary residence, and the sale of a 78 acre parcel of investment property.