Applied income from sale of land towards new primary home

[gwendreyer]

Slightly complicated...1) We subdivided the land that was party of our primary residence. 2) We sold the land but not the house. 3) We bought a new primary residence, and took most of the income from the land sale towards the new home to reduce the mortgage.

Do I have to pay capital gains on the full land sale amount? Where do I indicate that I put the proceeds toward a new home? Right now, Turbotax thinks I had a lot of income, and that I owe a lot of federal tax!

[DianeW · Accepted solution]

Yes, you have to pay capital gains on the full land sale.  The sale of the land that was part of the sub-division is a separate transaction than the purchase of another home.

When you report the land sale be sure to include the prorated share of the original purchase, the portion of the sub-division cost that applies to that parcel and any expenses of sale to arrive at your cost basis.  The gain on this sale will receive a special tax rate, below your regular rate of tax, if the land was owned more than one year.  If not, it will be taxed at your regular rate.

The purchase of the new home does have some deductions that may help to reduce your overall income if you can itemize deductions.

You can deduct the mortgage interest and property tax paid in 2016 if you are able to itemized deductions.  Be sure to include any points as well as mortgage insurance premiums (also known as MIP or PMI*). This information will be on the settlement statement, usually known as the HUD1, or on the year end statement from the lender.  If property taxes were paid by you and not the lender you would determine that amount paid from your funds (not the escrow).

• Note:  *Deducted over 84 months beginning with the first month of payment.  VA funding fee or Rural Housing Service funding fee is fully deductible in the year of purchase and is not considered PMI.

• The items on your HUD-1 or other Settlement Statement will fall into categories noted. 
  

• Seller/Buyer:  Amounts shown for your prorated share of property tax for the year of sale - 2016 (deducted on itemized deductions)
• Buyer:  Amounts shown for advance payments to escrow to cover any expense that may be needed before enough mortgage payments can be made such as insurance and/or property taxes (not deductible)
  
• Buyer:  Points if applicable and mortgage interest (deducted on itemized deductions).  Points paid by the seller are deducted by the buyer.
• Buyer:  Occasionally there is a small amount of mortgage interest charged at settlement to cover the period from approval to closing.  If you have the same lender in December it may be included on the Form 1098.
• Any other items on the settlement statement will be added as purchase expenses to the purchase price reducing the taxable gain on the sale in the future.

• Sign into your TurboTax Account - 
• My Account in the upper right > Tools > Topic Search > Type itemized deductions > Go 
• Continue to enter your expenses
• Click the screenshot attached to enlarge and view for assistance

[gwendreyer]

Hi Diane,

Well, I actually took this situation to HR Block, and they said as long as you move from one primary residence to another, any profit made on the sale of the first primary residence, you do not have to pay capital gains tax. Which is great, because the profit was significant with the land subdivision. I think a couple caveats are 1) we had to sell the first residence as well, not just the land, which we did, and 2) you can only take advantage of this type of situation once every 5 years, which prevents people from doing it as a business of buying land, subdividing, and immediately moving. 

Thanks goodness...they saved me a lot of money.

Thanks,

Gwen