IRS Publication 523 - Vacant Lot Sale

[wdthompson51]

Hello,

In 2021 I subdivided my primary property creating one vacant lot directly adjacent to my primary residence. I sold the vacant lot to a contractor and my primary residence to a home buyer. (Two completely separate transactions). Please confirm that the subject IRS publication applies to this scenario and that I can apply the full 250/500k exclusion on my taxes. Also, what type of documentation should I keep on hand to prove this. 

[DaveF1006]

You can apply the 250/500k exclusion on my taxes on the sale of your home but not on the sale of your land. When you subdivided your land, you created an investment opportunity for that piece of land to be separated from your remaining property. Here is how to report the sale of your land.

1. Income and expenses once you open your Turbo Tax program.
2. Investment Income.
3. Did you sell any of these investments in 2021? Say yes
4. Stocks, Cryptocurrency, Mutual Funds, Other (1099-B)
5. Choose the Other option on what type of investment was sold
6. Type in the name of the company when TurboTax requests a name
7. Choose Other for the type of investment sold and answer the questions
8. Next screen says Now we’ll walk you through entering your sale details. Here in the first drop-down, select land(other investment purposes)
9. Next drop down you will indicate you purchased the land.
10. Enter the Proceeds you received equal to the gain you want to report.
11. To determine cost basis of the portion of the land is a little tricky. You will need to look at the records in the county assessor's office to determine if there is a percentage split between land and building that is listed in your parcel. Also, look in your buyers documentation to see if there is a split between land and building.

[wdthompson51]

@DaveF1006 How would you ever apply the Vacant lot sale in 523 without doing a subdivision? So, the only way to avoid paying capital gains taxes on the lot sale would be to go with a 1031 approach?

[DaveF1006]

@wdthompson51  Since the property was subdivided, the two transactions are reported separately, with the vacant lot sale being reported as an investment property. You can however defer the capital gains if you invest in a property or properties of like kind and equal or greater value known as a 1031 exchange. 

In this case, if you purchase a piece of land that is equal or greater value than the land you sold, you may defer the gain of the sale. According to this IRS.gov document, in order to defer the gain, two conditions must be met:

1. The first limit is that you have 45 days from the date you sell the relinquished property to identify potential replacement properties. The identification must be in writing, signed by you and delivered to a person involved in the exchange like the seller of the replacement property or the qualified intermediary.
2. The second limit is that the replacement property must be received and the exchange completed no later than 180 days after the sale of the exchanged property or the due date (with extensions) of the income tax return for the tax year in which the relinquished property was sold, whichever is earlier. The replacement property received must be substantially the same as property identified within the 45-day limit described above.