How Do I Report A Loss From The Sale of Vacant Land?

[evkossoff]

We owned a vacant lot of land for many years hoping its sale price would improve but still ended up losing a lot of money when we finally sold it in 2022. I assume we can use this loss to reduce our overall taxes and, if so: 1) where do we enter it in TurboTax Premier 2022, 2) how many of the various related costs over the years can we include to adjust its basis, and 3) where can we find any other info we’ll need to know when entering this?

[DoninGA]

If this land was used as an investment property and NOT for personal use only the the sale would reported as an investment sale with a capital loss.  Only the cost of any improvement to the property can be added to the basis of the property.

To enter an investment sale -

Click on Federal Taxes (Personal using Home and Business)
Click on Wages and Income (Personal Income using Home and Business)
Click on I'll choose what I work on (if shown)
Under Investment Income
On Stocks, Cryptocurrency, Mutual Funds, Bonds, Other, click the start or update button

Or enter investment sales in the Search box located in the upper right of the program screen. Click on Jump to investment sales

[evkossoff]

So can I assume such improvements as installing a gate, tree clearing, mowing fields, grading/clearing land, etc., can be added? And, similarly, surveying/engineering fees, related to property line marking, staking/mapping fields, etc., are all legitimate? While, on the other hand, the payment of property taxes can not be considered an improvement and thus can not included?

[DoninGA]

@evkossoff You assume correctly.

[Opus 17]

Mowing, no.  Surveying, maybe.

You must distinguish between maintenance and improvements.  Improvements (or betterments) are permanent changes to the land or attached items (including structures and landscaping) that add value or adapt the property to a new use.  Cutting trees and leveling and clearing the land would count, as would installing a fence or gate.  Also, installing utilities (sewer, water, power) including getting the appropriate permits. 

I would view mowing as more of a routine maintenance item, and not an improvement that adds to cost basis.

The issue with surveying and staking is, it's not really a permanent improvement or betterment.  It can be part of an improvement, such as work you do preparatory to installing utilities or getting permits.  That would be included in the cost of the improvement.  But if you got the property staked so you could see the layout, but then you abandoned your plans to further improve the property, then I'm not sure the surveying is an improvement.  Likewise, the cost of getting permits to add utilities, an access road, etc. would only be includable if you either acted on the permit, or the permit is transferable to the new owner, so they can do the work without getting a new permit.  If you paid for items and then abandoned them, so the property does not actually get the benefit, then I would not include them.

Up through 2017, your annual carrying costs (like mowing, property taxes, and other expenses to maintain the property) could either be deducted as investment costs, or they could be capitalized (added to the cost basis) by making an election and including a detailed written statement attached to your tax return.  If you capitalized your costs, you can add them to the cost basis when you report the sale, assuming you kept copies as proof.  If you did not capitalize your carrying costs at the time, you can't include them now.  (Carrying costs are not allowed to be deducted or capitalized for 2018-2025 due to the 2017 tax reform law.)

[evkossoff]

So are you saying all of our carrying costs, including property taxes, can be deducted as investment costs but only through 2017?

And can I assume all of our marketing costs (to sell the property) through 2022—beyond just the real estate commissions—can be similarly deducted? Our 9+ acre residential lot, for example, was especially hilly, with fantastic panoramic views at the top, but to get potential buyers there we had signs made with full-color photos of the views and placed down by the road. Moreover, without brush hogging/clearing/grading/mowing our property no one would have been able to reach the top and see those views since our lot was so heavily wooded and had become so overgrown—thus our property would likely never have sold, so we had much of that work done not only as an improvement but also to sell the lot. Similarly, we had its boundaries staked, etc., so a potential buyer would know where the property began/ended.

Finally, are there specific forms we should use to detail these costs, adjustments, etc.? If so, I don’t readily see them in TurboTax. Or do we need to include them in a separate letter? Or can we simply wait to see if the IRS requests additional info?

[Opus 17]

"So are you saying all of our carrying costs, including property taxes, can be deducted as investment costs but only through 2017?"

No.  Up through 2017, carrying costs could have been deducted as miscellaneous itemized deductions subject to the 2% rule. They would have been deducted on each year's tax return, assuming that you itemized your deductions and that you had enough miscellaneous deductions to make a difference.  It is too late now to amend those prior tax returns to claim the deduction, and you can't deduct prior costs in the current year -- partly because that's not how taxes work, and partly because the miscellaneous itemized deduction has been eliminated.   In lieu of taking the expenses as miscellaneous itemized deductions, you could have capitalized them. But if you did not, it is too late to recover them now.  

Advertising is an allowable selling expense that reduces your selling price when figuring the capital gains.  Advertising expenses are not allowed to make changes to the property.  For example, when selling a house, you can deduct "staging" as long as you make no changes to the house, but if the real estate agent also recommends painting, that is a maintenance item, which is not allowed as an adjustment.  (There are never adjustments for maintenance, because maintenance is the routine and ordinary duty of every property owner.)

Whether staking is an advertising expense, I leave to your risk to claim or not claim.  It changes the property (like painting), but the stakes can be removed (like taking the rented furniture back after staging).

Brush hogging sounds like routine property maintenance that is your responsibility whether or not you sell the property, so it sounds like a cost that is not an improvement and not advertising.

You simply report the cost basis, adjustments, and selling price on your return.  Keep records for at least 3 years in case of audit (6 years is better).