Tax Consequenses Of Selling Land Held As Investment Property
I know I should have researched before buying, but deal was too good to be true. Almost 3 years ago I bought a lot for investment. Now I would like to sell it. I have never reported anything related to this property on my tax return. I should be able to sell it for $30,000 more than purchase price. What expenses can I deduct and how will I have to report it on my taxes. It is the only investment I have ever owned.
Thanks for any info you can give me.
Sales price minus basis of property minus cost of sale =capital gain. You cannot depreciate land so there is nothing to recapture. If you fixed the lot up, like installed sewers, water, or electric/gas, concrete driveway and such you can add those cost to basis of property. The larger the basis of property the smaller the capital gain. The smaller the capital gain the smaller the tax due.
I have interest expense as well as property owners dues, would I be able to deduct them as investment expenses?
You can take a mortgage interest deduction, but not directly, and only if you itemized your tax returns for the past three years.
The mortgage interest would have been deducted in the year you paid it as an investment interest deduction on Schedule A.. This deduction is only available if you itemize your deductions. If you did itemize, then amend your tax returns for the three past years to take your investment interest deduction.
Property association dues are a personal expense, not deductible in your situation.
When you sell the property, report the sale on Schedule D (1040).
Newkid It most certainly is deductible and you did not read my first sentence.
"This is investment property nothing personal here. You held it to sale at profit you are entitled to deductions the same as if it were a rental. "
Any improvements would have been added to the basis of property also just like other rental properties. My answer was not saying I thought he had a rental property. He said he had an investment property and the same deductions apply. He had property bought at risk to keep for investment and was going to make a profit. That is why I showed him that list.
Here is an excerpt from IRS Publication 550-Investment Income and Expenses.
Investment expenses. Investment expenses include all income-producing expenses (other than interest expense) relating to investment property that are allowable deductions after applying the 2% limit that applies to miscellaneous itemized deductions. Use the smaller of: The investment expenses included on Schedule A (Form 1040), line 22, orThe amount on Schedule A, line 26.As I interpret this, land held for future appreciation is not property held for the production of income so I conclude that the property association fees are not deductible.
Even if I am wrong in my interpretation, I suspect the question is moot, however, since the annual property association fees are not likely to exceed the 2% floor on miscellaneous expenses.
NewKidinTown3,
I agree with you.
Quote:
On 2005-11-08 23:19, NewKidInTown3 wrote:
Here is an excerpt from IRS Publication 550-Investment Income and Expenses.
Investment expenses. Investment expenses include all income-producing expenses (other than interest expense) relating to investment property that are allowable deductions after applying the 2% limit that applies to miscellaneous itemized deductions. Use the smaller of: The investment expenses included on Schedule A (Form 1040), line 22, orThe amount on Schedule A, line 26.As I interpret this, land held for future appreciation is not property held for the production of income so I conclude that the property association fees are not deductible.
Even if I am wrong in my interpretation, I suspect the question is moot, however, since the annual property association fees are not likely to exceed the 2% floor on miscellaneous expenses.
NewKidinTown3,
I agree with you.
Quote:
On 2005-11-08 23:19, NewKidInTown3 wrote:
Here is an excerpt from IRS Publication 550-Investment Income and Expenses.
Investment expenses. Investment expenses include all income-producing expenses (other than interest expense) relating to investment property that are allowable deductions after applying the 2% limit that applies to miscellaneous itemized deductions. Use the smaller of: The investment expenses included on Schedule A (Form 1040), line 22, orThe amount on Schedule A, line 26.As I interpret this, land held for future appreciation is not property held for the production of income so I conclude that the property association fees are not deductible.
Even if I am wrong in my interpretation, I suspect the question is moot, however, since the annual property association fees are not likely to exceed the 2% floor on miscellaneous expenses.
getitqwik,
That was an excellent explanation of your position.
Newkid here is what I think from the IRS and Cornell Law Library:
http://www.irs.gov/publications/p544/ix01.html
Section 1250 property defined. This includes all real property that is subject to an allowance for depreciation and that is not and never has been section 1245 property. It includes a leasehold of land or section 1250 property subject to an allowance for depreciation. A fee simple interest in land is not included because it is not depreciable.
If your section 1250 property becomes section 1245 property because you change its use, you can never again treat it as section 1250 property.
http://www4.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00001245----000-.html
(3) Section 1245 property
For purposes of this section, the term “section 1245 property” means any property which is or has been property of a character subject to the allowance for depreciation provided in section 167 and is either—
(A) personal property,
(B) other property (not including a building or its structural components) but only if such other property is tangible and has an adjusted basis in which there are reflected adjustments described in paragraph (2) for a period in which such property (or other property)—
(i) was used as an integral part of manufacturing, production, or extraction or of furnishing transportation, communications, electrical energy, gas, water, or sewage disposal services,
(ii) constituted a research facility used in connection with any of the activities referred to in clause (i), or
(iii) constituted a facility used in connection with any of the activities referred to in clause (i) for the bulk storage of fungible commodities (including commodities in a liquid or gaseous state),
(C) so much of any real property (other than any property described in subparagraph (B)) which has an adjusted basis in which there are reflected adjustments for amortization under section 169, 179, 179A, 185,[1] 188 (as in effect before its repeal by the Revenue Reconciliation Act of 1990), 190, 193, or 194,[2]
(D) a single purpose agricultural or horticultural structure (as defined in section 168 (i)(13)),
(E) a storage facility (not including a building or its structural components) used in connection with the distribution of petroleum or any primary product of petroleum, or
(F) any railroad grading or tunnel bore (as defined in section 168 (e)(4)).
(4) Special rule for player contracts
(A) In general
For purposes of this section, if a franchise to conduct any sports enterprise is sold or exchanged, and if, in connection with such sale or exchange, there is a transfer of any player contracts, the recomputed basis of such player contracts in the hands of the transferor shall be the adjusted basis of such contracts increased by the greater of—
(i) the previously unrecaptured depreciation with respect to player contracts acquired by the transferor at the time of acquisition of such franchise, or
(ii) the previously unrecaptured depreciation with respect to the player contracts involved in such transfer.
In my humble opinion you get lost trying to classify land without legal help. If I had an interest of a major property and stood to lose BIG TIME, I personally would consult a Tax Attorney. I advise others to do so also. I can see we disagree but I still read your posts they are insightful. I learn from them also.
This thread is a great example of the learning available here. Obviously in this thread we have at least two sharp professional minds taking their time to intelligently present their opinions in a forum available to all of us. Thanks getitqwik and newkid.[ Edited by jimandlacy on Date 11/10/2005 ]
NewKidd is right on the money.
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In a different thread a few months back it was suggested that the mortgage interest could be added to the basis of the property ... this thread of course seems to contradict that one. I am still open to comments/suggestions on the other thread: http://www.thecreativeinvestor.com/residential/ViewTopic49352-23-4.html
Not trying to hijack this thread but rather looking at another line of thought presented earlier.... Thanks!!!
I have very much enjoyed reading both sides of this issue...it has been one that has intrigued me for years.
If you will allow a related question...
Can this "lot" be used as part of a 1031 exchange into a new property?
Definitely. The lot is property held for a qualified investment use and therefore can be the relinquished property in a 1031 exchange.
Absolutely, property held for investment, including vacant land, will qualify for 1031 exchange treatment.
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Interesting concept ... but I have no clue to the correct answer. There is a SD-IRA forum elsewhere.... http://www.iraplus.com/iraplus/qa.sqrl[ Edited by fbprop on Date 11/27/2005 ]
Any strategy and/or transaction conducted exclusively for the sole purpose to evade income taxes is tax evasion. This proposed structure is clearly planned to evade taxes, and because it was devised specifically to evade taxes could also be classified as crimminal tax fraud. Walk away from the idea.
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