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The sale of acreage is a taxable event, regardless of whether a structure such as a house is attached to the land. If you profit from the sale, you may or may not be taxed on your profit. If your profits are taxable, you might be taxed at either ordinary income tax rates or at capital gains tax rates. If you sell your property at a loss, you may be eligible for a tax deduction.
Capital Gains Tax
Real estate, including unimproved land, is considered a capital asset by the Internal Revenue Service. As a consequence, as long as you hold your property for more than a year before selling it, your profits are taxed at capital gains tax rates rather than ordinary income tax rates. The maximum capital gains tax rate is 15 percent. However, a new 3.8 percent surcharge took effect in 2013 that is applicable to individuals with adjusted gross incomes exceeding $200,000 ($250,000 if married filing jointly), making their effective maximum rate 18.8 percent. And for singles with taxable incomes higher than $400,000 and couples with incomes over $450,000, the base rate rose to 20 percent, bringing the total to 23.8 percent. Capital gains tax is levied only if you enjoy an aggregate capital gain on all sales of capital assets during the tax year.
You can reduce or even eliminate your capital gains tax liability from the sale of acreage if you incur a capital loss on the sale of investment property in another transaction during the tax year. Such investment property could include not only real estate but also other capital assets such as corporate stock. If you engage in more than one sale of capital assets during the tax year and end up with a net loss -- which could happen even if you profit from the sale of acreage -- you can deduct up to $3,000 in losses ($1,500 if married filing separately) from your taxable income, and carry the rest of your loss forward to future tax years.
"Flipping" Real Estate
If you sell real estate within one year of purchasing it, any profit you make is classified as a short-term capital gain by the IRS. Short-term capital gains are taxed at ordinary income tax rates, not capital gains tax rates. For this reason, "flipping" real estate for short-term profits will not allow you to take advantage of capital gains tax rates.
The Homestead Exception
If your acreage includes a home and you lived there as owner for at least two of the five years leading up to the sale, you may qualify for a special capital gains tax exemption of your first $250,000 in profits ($500,000 if you are married filing jointly). These profits are also exempt from ordinary income tax. The downside of this rule is that you cannot deduct capital losses from the sale of your main home. Special, more complex rules apply to the sale of vacation property.
- Internal Revenue Service: Ten Important Facts About Capital Gains and Losses
- Bankrate.com: Capital Losses Can Help Cut Your Tax Bill
- Internal Revenue Service: Sale of Residence -- Real Estate Tax Tips
- Inc.: With New Capital Gain Tax Rates, Should You Buy or Sell?
- Wall Street Journal: Get Ready for the New Investment Tax
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