Your capital gain is the difference between the selling price and the cost basis, which is your fathers original purchase price plus cost of improvements. Because you owned the property more than one year, this is tax as a long-term capital gain at 15% or 20%, depending on your other income. It will also be tax as ordinary income in your home state, because most states don’t have separate capital gains tax rates. When you file your tax return and report the capital gain, don’t include proof of your cost basis, but keep it with your other tax papers for at least six years in case of audit.
You can also include as adjustments to your cost basis, certain closing costs associated with the purchase and sale of the land. These closing costs are described on page 8 of IRS publication 523. This includes your real estate commission and certain government imposed taxes and fees. https://www.irs.gov/pub/irs-pdf/p523.pdf
You probably received a 1099-S statement at the closing which lists the selling price. Because of how IRS computer matching works, you will need to list the selling price from the 1099S as your selling price, and apply any adjustments to the cost basis, rather than reducing the selling price. In other words, if you sold the land for $50,000 and paid a $3000 real estate commission, report your selling price as $50,000 and your cost basis as $13,000, instead of reporting the selling price as $47,000 and your cost basis as $10,000. The result comes out the same, but the IRS computer wants to see the selling price from the 1099S on your tax return.
