The sale of land is a taxable event if you sell it for a profit. The taxes on land sales can be pretty steep if your land has greatly appreciated in value since you bought it. However, there are ways to reduce the amount of taxes that you pay. And if you sell your land at a loss, you might be entitled to a tax deduction.
Taking the Primary Residence Exclusion
If you sell your main home, you are entitled to exclude up to $250,000 in capital gains from your taxable income. This exclusion increases to $500,000 if you are married and filing jointly. Your capital gains equal the selling price minus your adjusted basis. Your adjusted basis typically equals the price you paid for the home plus certain expenses connected with your purchase, such as real estate broker fees.
To qualify for the full value of the exclusion, you must have owned and lived in your home for at least two of the five years before the sale was finalized. If you sold land but no house, you cannot qualify for this exclusion.
Paying Lower Taxes on Land Sales
If you do not qualify for the primary residence exclusion – because you do not live on the property, for example, or because it is vacant land – you might still qualify to pay the long term capital gains tax rate rather than ordinary income tax rates. This will save you money because capital gains tax rates are lower regular income taxes – 15 percent for most taxpayers, 20 percent for some high earners and zero percent for certain low-income taxpayers.
To qualify for these rates, you must incur a net long-term capital gain for the year from all of your transactions, including the sale of your land. If you sell at a loss and want to classify it as long-term rather than short-term, you must have owned the land for at least a year before you sold it.
Writing Off Capital Losses
You incur a capital loss when you sell land for less than its adjusted basis. You can't write off capital losses for the sale of your primary residence. But if the land you sell is not your primary residence, you can write off your capital loss to the extent that you incurred a net capital loss for the year.
You can exclude up to $3,000 per year in capital losses if you are filing married and jointly, or $1,500 if you are married and filing separately. If your capital loss exceeded the applicable limit, you can carry forward the excess loss to future tax years.
Using Like-Kind Exchanges
You can defer capital gains tax on the sale of land by making a "like-kind" exchange in accordance with Section 1031 of the Internal Revenue Code. To take advantage of Section 1031 you must either exchange your land held for business or investment purposes for other real estate or use the proceeds of the sale to purchase another parcel of real estate. In most cases, you have up to 180 days to complete the process. The sale of your property and the purchase of another must both take place within the same tax year.
Under a land contract, the buyer pays you in installments, and you transfer title only when the last installment is paid. For tax purposes, the IRS treats the transaction as if you transferred title immediately. Because you are receiving income over a period of several years, you will be taxed over a period of several years. You might find this an important advantage if your aggregate capital gains are large.
- Internal Revenue Service: Publication 550 (2017), Investment Income and Expenses
- Internal Revenue Service: Publication 523 (2018), Selling Your Home
- Washington Post: How the Tax Bill Impacts Homeowners, Buyers and Sellers
- Internal Revenue Service: Topic Number 701 - Sale of Your Home
- The Motley Fool: Your Guide to Capital Gains Taxes in 2018
- Fox Business: Stocks, Taxes and Profits: What You Need to Know in 2018
- IRS: Publication 537 (2017), Installment Sales
- IRS: Like-Kind Exchanges - Real Estate Tax Tips
- 26 U.S. Code § 1031 - Exchange of real property held for productive use or investment | U.S. Code | US Law | LII / Legal Information Institute
David Carnes has been a full-time writer since 1998 and has published two full-length novels. He spends much of his time in various Asian countries and is fluent in Mandarin Chinese. He earned a Juris Doctorate from the University of Kentucky College of Law.