Sell land adjacent to house - at loss.

[dugswife]

11 years ago we purchased 2 tracts of land.  One has our home. The other was vacant land next to our home that was used for hay and under AG exemption. (We filed as a farm for many years - but could not make it successful so stopped filing that in 2019.)  These two tracks were purchased under one balloon price - one mortgage.  We sold the 22 acres in 2020 - but for $80,000 less than it appraised (tax appraisal- market appraisal was more).  Are we allowed to deduct this for a loss or is it considered personal property?  And if we can deduct it how would we determine the purchase price since it was all rolled together with our home?

[Hal_Al]

The fact that you used it for business (farming) most of the time that you owned it, means that you can treat it as the sale of investment property (not personal property) and deduct the loss (a capital loss is limited to $3000 per year, the rest will carry forward to future years). 

For your cost basis, you will have to use your best estimate to assign the property amount of your original lump sum purchase price to the vacant land. Since the properties were separate tracks, the original (11 years ago) tax appraisals should provide you the correct ratio. 

For example: you bought the 2 properties together for $120,000. The tax appraisal for the house was $60,000 and the farm land $40,000.  40% of your purchase price can be allocated to the farmland.  40% x 120,000 = $48,000.

[DavidD66]

The tax appraisal value of the property is of no relevance in determining your gain or loss on the sale of the property.   

[dugswife]

Thank you Hal_Al, that makes sense.  Where do I find that in Turbo Tax?  Also if I sold it for more than I bought it  - but less than the current tax appraisal - is it a gain or a loss?

[Hal_Al]

Q.  I sold it for more than I bought it  - but less than the current tax appraisal - is it a gain or a loss?

A. You have a long term capital gain.

In TurboTax (TT), enter at:
- Federal Taxes tab (Personal in  Home & Business)

 - Wages & Income

Scroll down to:

-Investment Income

   -Stocks, mutual funds, Bonds, Other (Real estate is other)

Answer no, when asked if you got a 1099-B. then follow the interview.

[dugswife]

So its current value doesn't come into play at all?  Based on it's fair market value it is a considerable loss.  Are we allowed to use fair market value instead of cost basis?

[Hal_Al]

Q. Are we allowed to use fair market value instead of cost basis?

A. No.

Fair Market value, by definition,  is what it would sell for. Under that rule, there would never be an taxable gains (or losses).