I bought a house in 2023 that had an extra lot that could be split off and sold separately. Both the extra lot and the lot the house sits on are the same size.
I sold the extra lot in 2024, after owning it for a year. I hope to sell the house soon. I've never lived in the house.
Say the cost of the entire property was $900,000, and I sold the extra lot for $400,000.
How do I distribute the cost basis of $900,000 between the house and extra lot? They were previously taxed together, so I don't have separate assessments. I can see two ways:
1. Use the ratio of the sales prices. If I sell the house for, say, $800,000 and I got $400,000 for the extra lot, then I split the $900,000 initial cost at the same ratio: two thirds for the house and a third for the lot. So $600,000 would be the basis in the house and $300,000 would be the basis for the extra lot.
2. Look at how the assessment when I bought the property split the cost of the land and improvements. Say the assessment was $250,000 for the land and $750,000 for the house -- so 25 percent of the total price was for the land. I sold half the land; that would be $125,000 or 12.5 percent of the total assessed value. So I take 12.5 percent of what I paid ($900,000), which is $112,500, and use that as the cost basis for the extra lot.
This is quite a difference -- $300,000 vs $112,500. Is there an accepted way to do this, or is it a situation where you can use any method that you are prepared to justify? If I sell the house this year, is it a moot point, as I could then just add the sales prices together and treat it as a single sale?
Thank you.
