Selling Vacant Land

[baxleyas]

Hello,

Sorry if posted to wrong discussion board. But my wife and I are selling a piece of vacant land. We purchased it with the thoughts of building a home. That all fell through with the pandemic. Was cheaper to by a house already built. I am trying to figure out whether land improvements add to the overall value of the property or what can be deducted from the sale of the property or whatever you guys know/answer. I have been trying to find out what I can or can't do.

The land is in a rural area. It needs a septic tank, no city water. The land was not approved for a leach field at the time of purchase. So we spent 20k (has to be specific dirt, so many feet wide, long and deep, its also has to pass the perk test) bringing in dirt and creating a leach field so that we could even build a house on the property. 

Land Purchased 2017

Land Appraisal $55,000

Land Purchase Price $50,000

Approved Leach Field Cost $20,000

Land Selling Price $70,000

Thanks for all your help!!

[Opus 17 · Accepted solution]

Allowable adjustments to cost basis are listed in publication 523.

https://www.irs.gov/pub/irs-pdf/p523.pdf

The most important one for you is improvements; improvements to real property include anything that is permanently attached to the land (or in your case, under the land) and which either adds to the value of the property or extends its useful life.  A septic system would certainly be an improvement that raises your basis.

Certain closing costs may also raise your basis, but many don't.  Inspections and permit fees associated with installing the septic system are included in the cost of the system.

The appraisal has nothing to do with your basis or gain.

With that being said, you will likely show a small loss rather than a gain.  Losses on personal property aren't deductible, and you will have to report the sale on your tax return so the IRS has the figures, but it appears you won't have a taxable gain.