Selling a portion of our property

[hendonian]

We own several acres of property which is currently our homestead.  It includes wildlife exempted property and then a portion of the land includes our main home & barn.

We have decided to sell a portion of our wildlife exempted property and were curious if it would qualify for the exclusion of gain under publication 523.  

The land has been considered our homestead and we have lived on it for 2+ years and we are married filing jointly... so we definitely meet the eligibility test, however we are not Selling all of our property or our residence.

In this case, does the property we are selling become "vacant land" at the time of the sell, in which case it sounds like we would need to pay capital gains or if we use the sell of the land to pay off the mortgage on our main house would it not apply since technically we are putting the "gain" back into property?

Any insight would be super helpful.  Thanks in advance.

[Opus 17]

What you do with the money after the sale has no affect on the tax treatment of the sale itself.

You don't qualify for the capital gains exclusion unless you also sell your home within 2 years of subdividing and selling the exempted land.

Assuming you remain in your home, you must deal with the capital gains on the land portion of the sale.  You will have to determine the cost basis of the subdivided portion, I can't point to a specific formula how to do that.  It could be as simple as so many dollars per acre, but it might be more complicated in your case since the land you are selling is restricted use.  (In other words, suppose you bought 10 acres zoned as residential/farming for $100,000.  It might be reasonable that the cost was $10,000 per acre since all the land is basically the same.  But if 3 acres are restricted use, and can't be used for a home or farm, then it might be more reasonable that the restricted land was $5000 per acre and the usable land was $12,142 per acre.)  You may need the assistance of a real estate appraiser.

Then, you must also adjust the cost basis of the remaining property for whenever you get ready to sell it.  Suppose you bought the entire property for $250,000 (your cost basis), and you determine that the cost basis of the portion you sold was $10,000.  You sell for $25,000 and report a $15,000 capital gain.   You would also reduce the cost basis of the remaining property by $10,000. 

[Mike9241]

there is IRS REG 1.121-1(b). it says the sale of vacant land that has been used as part of the principal residence can be excluded only if the land sale occurs within 2 years before or after the sale of the dwelling unit.  so the sale of only the land doesn't qualify for any exclusion in your situation.  if later you were to ell the residence within 2 years after the land sale you could go back and amend the return for that year to use up part or all of your exemption any remaining exclusion could be used on the home sale. that's because th sale of the house and vacant land are treated as one sale for the exclusion.

[hendonian]

Thank you both for your replies.

I have 2 follow up questions that perhaps you can clarify.  🙂

1) If the  Form 1099-S,  that is reported from the Title Company shows the sale price, and then payment of 'debt' related to the sale, and the gross proceeds are essentially $0.  Would this mean we have no gains?

2) Alternatively, if we determine we do have gains and calculate those gains,  would we be able to reinvest those gains within the 2 year period to defer the tax owed or go back and amend the tax filing to recoup those funds??

[Carl]

1) If the  Form 1099-S,  that is reported from the Title Company shows the sale price, and then payment of 'debt' related to the sale, and the gross proceeds are essentially $0.  Would this mean we have no gains?

No, not necessarily. It just means that no physical cash (or check) for a positive amount was paid to you directly, at the closing.  Seems no two closing agents handle the 1099-S the same. Any gain on the sale that was used to pay off the balance of what you sold is still gain to you. Sometimes I've seen the payoff amount included in the 1099-S. Other times I've seen it not included. So you should not trust the 1099-S numbers at all. (my opinion.)

would we be able to reinvest those gains within the 2 year period to defer the tax owed or go back and amend the tax filing to recoup those funds??

No. that tax rule was eliminated over 20 years ago. What you do with the gain does not matter. If it's taxable, you pay taxes on it. Period.