If i sale land i have held for 20 years, can i increase basis

[joe1937]

to hold down my taxes

[Anonymous_]

No, you can't increase your basis unless you have made improvements. 

[Opus 17]

Certain closing costs at the time of purchase can be used to increase your basis. These are costs that you are required to pay whether you purchased in cash or financed, and might include required inspections, or county transfer taxes or deed recording fees. Similar costs of selling can be subtracted from your sales proceeds, including required fees, transfer taxes and the real estate commission.

You can also increase your basis by the cost of any permanent improvements that you made over the years, such as installing utilities. If you had to pay for county permits or inspection fees when you installed utilities, that can also be included.

You also increase your basis if you capitalized your carrying costs. (If you don’t know what that means, then you didn’t do it.) If you did capitalize your carrying costs, then you should have records to back it up.

But you don’t get an inflation adjustment or any other adjustment to cost basis, simply because you held the property for a long time.

[joe1937]

I have made improvements should clearing timber, making roads, I was wanting to know how to apply to basis and what type of improvements I can use.

[Opus 17]

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@joe1937 wrote:

I have made improvements should clearing timber, making roads, I was wanting to know how to apply to basis and what type of improvements I can use.

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Was this income-producing property, such that you should have depreciated the improvements?  It seems not, but I should probably ask.

Assuming this was vacant land you were holding for investment or to maybe build your own house on, then you can include the cost of improvements you paid for in your cost basis.  An improvement to real property is something that enhances the value in the nature of a betterment, extends the useful life, adapts the property to a new use, or ameliorates a defect.  I would think that building roads would be an improvement, especially if the purpose was to make the land suitable for further development.  You can include the cost of the roads (that you paid for) plus any necessary inspections and permits.  If you needed to clear the land (remove trees) to enable building the roads, that may also be an improvement, however, you would have to offset it somehow by the value of the timber if you sold it instead of just having it hauled away.

You can't include the value of your own time or labor, just costs you paid for.

There is a lot of discussion on the IRS web site about the definition of improvement, mostly in the context of deciding what counts as an improvement to commercial property that must be depreciated, but the same general principals will work for non-commercial property.

[joe1937]

Do you have to have backup for all the improvements you made over the 20 years?

[Opus 17]

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@joe1937 wrote:

Do you have to have backup for all the improvements you made over the 20 years?

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“Deductions are a matter of legislative grace;
taxpayers bear the burden of substantiating their
claimed deductions by keeping and producing
records sufficient to enable the Commissioner to
determine the correct tax liability.” INDOPCO,
Inc. v. Comm’r, 503 U.S. 79, 84 (1992)

If audited, the IRS only has to award adjustments you can prove with sufficient records.  The IRS still has to be reasonable; if you can prove there was no road in 2000 and there was a road in 2023, they can't just assume elves built it in the middle of the night for free. They would generally have to allow something, but it might not be as much as you actually paid.