I purchased 13 acres of land for $100k in 2018. I subdivided the land into two parcels and I'm looking to sell one of them. How can I have the lowest tax when I sell?

[stephen-t-gilber]

I purchased 13 acres of land for $100k in August 2018. I've subdivided the land into two parcels (2 acres and 11 acres) and I'm looking to sell one of them. How can I have the lowest gain and lowest tax on the property I'm looking to sell?

I'm building a home on the 11 acre property and I'm hoping to sell the 2 acre lot. 

The lot was originally appraised at $100k. The entire lot was under the tree growth program in Maine, and I've paid the $15k penalty and converted it to two buildable home lots. I also cleared the two acre lot and added a driveway. I believe property is far more valuable now, but if basis is calculated from an acreage standpoint, the 2 acre lot is it's only 15% of total expense, even though the value of each lot is unique. 

I'm assuming I will need to pay ordinary income tax if I sell under 1 year, and long term capital gains if I sell further down the road. 

What's the best way to sell the lot and avoid paying taxes? How can I have the lowest gain on the property I'm looking to sell? 

This one is confusing me. Your help and advice is much appreciated.  Thank you!!!  

[KrisD]

The lowest gain would be if you threw up a trailer/mobile home on the 2 acre lot, lived in it for 2 years and sold it. (no capital gain) then built and live in the house on the 11 acre lot. 

Other than that, you would need to show the IRS that you used a reasonable process to come to a basis for the 2 acre and 11 acre lot.

I would use a percentage  of value (.85 for the 11 acres, .15 for the 2 acres or 84,615 and 15385 or 7,693/acre ) to allocate the expense to separate the lots.

The value of the lots could be allocated by an appraiser or Real Estate Broker if some of the land is more valuable that the rest.

The best answer is that you would need to have "Justification" of what values you use to answer to the IRS if needed.   

[Don from NH]

We have a similar situation.  We've seen the allocation method in the code.  (Purchase price divided by acres = cost basis by acre)  where is the reference to using an outside appraisal to affect cost basis?  ( we bought 48 acres and subdivided into four 2.5 acre lots, consuming 10 which we'll sell).  We think the remaining 38 acres have lower value than the 10 we sold off)

Thanks,

Don

[pk]

@Don from NH ,  like to point out that any gain is based  Sales amount   ( which is sold price less sales expenses) LESS adjusted basis  ( which is acquisition cost plus cost of improvements ).  There is no place for current value in this computation. You can quite rightly and with good logic/ comparables  prove that portion A of the total is x times more valuable  then the remainder of the asset, but your total basis  is still based on allocated acquisition cost plus improvements costs.  I think the suggestion offered by @KrisD  is a very good one  --- nothing in the law stops you from doing that.  There may be other contortions one can do but for such you need a well paid lawyer to help you avoid pitfalls -- fundamentally you have create losses to reduce your gain so that taxable income is reasonable.  Far beyond any of us here , I think.  IMHO

pk