QUESTION DETAIL
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I have a home on 5 acres for 47 years. I have prepared and sold 3 of those acres to a developer to build 6 homes. Is there anyway to use part of the capital gains exclusion on this sale? How can I save on capital gain taxes when my cost basis is very low.
ANSWER
Expert Carlton Melton's Answer:
The sale of the land could possibly qualify for capital gain exclusion under the sale of your main home rules stated in Publication 523. The sale of vacant land may qualify as the sale of your main home, and therefore the exclusion that accompanies the sale if:
1. The vacant land is adjacent to land containing your home,
2. You owned and used the vacant land as part of your main home,
3. The separate sale of your home satisfies the requirements for exclusion and occurs within 2 years before or 2 years after the date of the sale of the vacant land, and
4. The other requirements for excluding gain from the sale of a main home have been satisfied with respect to the vacant land.
If you meet these requirements then the sale of the land and the sale of the home are treated as one sale, and you are allowed a single exclusion for that sale. If you do not fulfill these requirements then the sale will be treated as a long-term capital gain transaction, and you will be able to offset any capital gains with capital losses in accordance with the netting procedures outlined in the Internal Revenue Code (IRC). Publication 523 outlines all of the specifics for the sale of your home.
If the land was sold as 6 separate parcels then it is possible to treat the gain from the sale as though it were from the sale of property held primarily for sale to customers in the ordinary course of business, up to 5 percent of the selling price of the land. However, there are very specific guidelines that must be met in order to qualify for this treatment. These include rules relating to the manner in which the improvements to the land were made, the holding period of the land, and guidelines for the treatment of the expenditures made while completing the sale. These guidelines are laid out in Section 1237 of the IRC. If you have any other questions I will be happy to try and help answer them for you.
