Splitting Excess Land And Residence/ Tax Consequenses
I have a 1.5 acre retail/residential property that I bought for $67000 a couple of years ago. I have a buyer for the empty 1 acre that doesn't want the residence. I'm going to sell the house anyway so the buyer suggested paying me $80,000 for the 1 acre lot, which would pay off my current mortgage on the property, with $20,000 of his purchase price becoming a first mortgage on the house which would allow me to do some repairs and upgrades and resell the house a little bit later at around $65,000-$70,000 and pay him back the $20,000 with a little interest. It sounds like a good deal to me but with the land being divided and the mortgage through the buyer I'm not sure exactly what that would do to my capital gains on the property. Am I going to get bit twice with capital gains taxes or will I have to pay capital gains at all,i. e. a loss on the land over the original purchase price of the entire property and an exchange on the house to a bigger and better model when I sell it later? I hope this makes enough sense for someone to venture an answer.
You are planning to sell two-thirds of the land your primary residence sits on. If you are going to have a tax liability, let's try to quantify your cost basis for the land you plan to sell.
One reasonable approach is to take your property tax bill and use the assessed value for the land and the total assessed value to calculate the percentage of your property's value is attributed to the land only.
Next, multiply your original purchase price by this percentabe to determine how much you actually paid for the land. Because you are only selling two-thirds of your land, multiply the price you paid for the land by two-thirds. This amount is your cost basis for the acre of land you plan to subdivide from your property and sell.
Now, your plan is to sell your property for $60K. Plus you are going to give this investor a mortgage on your house for another $20K. Your potential capital gain on the sale of your land will be the difference between your cost basis and $60K. The extra $20K is borrowed money that will be repaid and is not taxable income to you. The current long term capital gains tax rate is 5% if you are in the 15% tax bracket or lower. Otherwise, for all higher tax brackets the long term capital gains tax rate is 15%.
It is not clear from your queston whether this property is your primary residence or an investment property. If investment property, then you will have a taxable event when you sell the subdivided acre, and another when you sell the house and remaining land.
If this property is you primary residence, then you are able to apply the capital gains exclusion on the sale of your primary residence to the land parcel you are selling now, and later to the house and remaining land you plan to sell later. Both sales must be completed within two years to qualify for the exclusion on the subdivided parcel. Consult your professional tax preparer for specific details.
Thanks for the information. It's my primary residence and with any luck I'll have the separate sales completed within about 6 months.