We purchased a vacant lot in 2012. In 2014, we subdivided it into 2 lots, and planned to build a home on 1 lot. We're now considering selling 1 or both lots, which are still vacant. I'm not in the real estate business, and don't own any other property. I've reviewed the Section 1237 exception, but am not sure how it applies in my situation. Will I pay ordinary income or capital gains tax?

ANSWER

The BIDaWIZ Team's Answer:

We do not believe the sale for either parcel of land will be subject to ordinary income tax based on the fact pattern provided. As per IRC Section 1317(a) and the case of Bruce A. Rice - T.C. Memo. 2009-142), the fact pattern provided does not imply that the taxpayer is selling land to customers in their ordinary course or business. The sale of land is infrequent, this is not the taxpayer's trade or business, and very little time has been set aside to manage the properties. We believe the sales should be treated as capital gains.

You must be referencing IRS Publication 544, which doesn't take into account all of the factors.

References: IRC Section 1317(a)
State: Texas