Capital Gains Tax on a Land Contract Sale?
I purchased two adjoining pieces of property seperately and pland to sell them seperately. It has been my primary residence for the last three years so I qualify for the 250,000 exemption from my understanding.
I am selling one piece for cash and another on a 15 year land contract at 8.75% interest.
The total capital gain even after all the interest is considered will be under 250,000. Do I have to pay any capital gains taxes?
Even if the land is adjacent, if you don’t sell them together, only the one with the house on it will qualify for the $250K exclusion (provided you can meet the tests).
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January 28th, 2010 at 10:22 am
Only the one that was actually your home qualifies for the exclusion. The other sale is fully taxable. Search "Installment Sales" on the IRS website for instructions on how to handle the land contract; it can get tricky.
References :
January 28th, 2010 at 10:59 am
It appears you should have bought the two chunks of land as one. any way, you can deduct the portion of the payments involved in buying, building and maintaining the dwelling. Make sure you have the receipts and documentation for all the expenses you involved when you bought and sold.
You may to consider an exchange instead of a sale regarding the other piece. That way you could postpone tax. You can bone up on IRS Code 1202, Qualified Small Business stock to exclude up to 50% of your gain.
Section 1045 and section 1202 both provide for special treatment of gain on the sale of QSB stock held by non-corporate taxpayers. Under section 1202 of the Internal Revenue Code (Code), a taxpayer other than a corporation (a non-corporate taxpayer) excludes 50 percent of gain on the sale of qualified small business (QSB) stock (as defined in section 1202(c)) from gross income if the taxpayer holds the stock for more than five years. Section 1045 permits a non-corporate taxpayer that holds QSB stock (relinquished QSB stock) for more than six months and sells it after August 5, 1997, to elect to defer recognizing gain on the sale. To qualify for such deferral, the taxpayer must purchase QSB stock (replacement QSB stock) within a 60-day period beginning on the date of the sale of the relinquished QSB stock. Any gain not recognized reduces the cost basis of the replacement QSB stock. Section 1045(b)(3). The taxpayer recognizes gain to the extent the amount realized on the sale of the relinquished QSB stock exceeds the cost basis of the replacement QSB stock. Section 1045(a). Section 1045 does not apply to any gain treated as ordinary income. Id.
There’s a way to exclude 50000 of your gain; 100,000 if married filing jointly. It involves registering as a new business and buying an approved business established after July 13, 1993,or something. I haven’t been able to find it on the IRS website. It may not apply to you anyway, unfortunately.
If you have already decided to sell, don’t sell it if you have held it for less than one year.
Here’s some stuff from irs.gov regarding basis, adjusted basis and installment sales.
References :
http://www.irs.gov/pub/irs-pdf/p537.pdf
http://www.irs.gov/publications/p551/index.html
http://www.irs.gov/irb/2004-32_IRB/ar19.html
January 28th, 2010 at 11:25 am
Even if the land is adjacent, if you don’t sell them together, only the one with the house on it will qualify for the $250K exclusion (provided you can meet the tests).
References :
IRS publication 523.
February 12th, 2010 at 10:45 pm
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