Capital gains tax

[talkypoo]

My neighbor wants to buy my vacant lot. We agreed on 30k but then his wife told me that if I sell it for 25k or less, there is no capital gains tax for me to pay. I live in TX where there is no capital gains tax. 

Is she correct or just trying to get a better price? 

[Bsch4477]

You would only pay federal tax. There is no advantage to you to lower your selling price. 

[rjs]

What your neighbor's wife told you is not correct. We can only guess why she said it. She might be misinformed, she might be trying to get you to lower the price, or there could be something else going on.

You never pay 100% tax. The more you sell the lot for, the more money you come away with, even if you have to pay some tax. You always come out ahead by selling at a higher price.

[VolvoGirl]

And she doesn't know your whole tax situation.   You are just taxed on your profit.  Your gain is sales price minus your cost so it will probably be less than than the sales price.  

[Opus 17]

The rules are a bit tricky if you are trying to split one parcel into two.  You will need to update us if that is the case.

However, if this is a separate lot and it had a separate purchase price from any other land you owe, your federal capital gains is simply the selling price minus the cost basis.  There are certain items you may be able to use to adjust the cost basis to reduce the capital gains, they are listed in IRS publication 523 on page 8 (if though the publication is aimed at home sellers, the same rules apply to vacant land).  You pay tax on any capital gains.  There is no exemption for small sales (under 25K or any other limit). 

https://www.irs.gov/pub/irs-pdf/p523.pdf

[rjs]

It's true that there is no exemption from tax on capital gains below a certain amount (other than when selling your primary home). However, if the gain is long-term and your other income is low, it's possible that part or all of the capital gain will be taxed at a 0% rate. In that case, while the entire gain is technically taxable, there is effectively no tax on the portion that is taxed at 0%. (This might be what your neighbor's wife is thinking of, but if so, she got the details wrong.)

You don't lose the 0% rate if selling at a higher price pushes your total taxable income above the limit for the 0% rate. Only the part of the gain that falls above the limit is taxed at a higher rate. The portion that is below the limit still gets the 0% rate. The taxable income limit for the 0% tax rate depends on your filing status, but it is not $25,000 for any filing status. And the limit applies to your total taxable income, not just the gain on the sale.