sale of land

[ajuroff]

Client purchased home and 40 acres in 1994 for $65,000. In 2007, client did a land split and sold off 35 acres for $157,500. The remaining 5 acres and home are still on the market. My problem, client has no idea on value of acres when purchased originally with home. Any idea how I can (or client) come up with a cost per acre amount for the original purchase?

[mgmea]

Client purchased home and 40 acres in 1994 for $65,000. In 2007, client did a land split and sold off 35 acres for $157,500. The remaining 5 acres and home are still on the market. My problem, client has no idea on value of acres when purchased originally with home. Any idea how I can (or client) come up with a cost per acre amount for the original purchase?

Assuming the home qualifies as his principal residence for purposes of the Sec 121 exclusion, please see the regulations for Sec. 121 for an example of this. I recall that in cases like this if the home and 40 acres were used as the principal residence the exclusion may be able to be used for the sale of the split off land, if it occurs within 2 years before or after the sale of the home I believe. You can also use the exclusion on the sale of the home, but both sales only get a total of $250,000 single, $500,000 married exclusion.

[mcb39]

Client purchased home and 40 acres in 1994 for $65,000. In 2007, client did a land split and sold off 35 acres for $157,500. The remaining 5 acres and home are still on the market. My problem, client has no idea on value of acres when purchased originally with home. Any idea how I can (or client) come up with a cost per acre amount for the original purchase?

I had a case like that earlier this year. Had them go back home and dig up old tax bills if they could find them (and they did). We used the basis that was on the tax bill as FMV at the time for the land. My clients had paid nothing for the land. In reality, though, the capital gain tax was quite minimal in comparison to the gain.

[ajuroff]

I'm reading Pub 523 and it states:

Vacant Land: The sale of vacant land is not a sale of your main home unless:

*The vacant land is adjacent to land containing your home.

*You owned and used the vacant land as part of your main home.

*The sale of your home satisfies the requirements for exclusion and occurs within 2 years before or 2 years after the date of the sale of the vacant land, and

*The other requirements for excluding gain from the sale of the vacant land have been satisfied.

So far, all the requirements are met...but what if the home doesn't sell within 2 years after the date of the sale of the land?

Still not sure how to come up with a cost basis on the acreage itself.

[mgmea]

I had a case like that earlier this year. Had them go back home and dig up old tax bills if they could find them (and they did). We used the basis that was on the tax bill as FMV at the time for the land. My clients had paid nothing for the land. In reality, though, the capital gain tax was quite minimal in comparison to the gain.

Reg 1.121-1

From this reg:

"C) Sale or exchange of vacant land before dwelling unit. If the sale or exchange of the dwelling unit occurs in a later taxable year than the sale or exchange of the vacant land and after the date prescribed by law (including extensions) for the filing of the return for the taxable year of the sale or exchange of the vacant land, any gain from the sale or exchange of the vacant land must be treated as taxable on the taxpayer's return for the taxable year of the sale or exchange of the vacant land. If the taxpayer has reported gain from the sale or exchange of the vacant land as taxable, after satisfying the requirements of this paragraph ((3) the taxpayer may claim the section 121 exclusion with regard to the sale or exchange of the vacant land (for any period for which the period of limitation under section 6511 has not expired) by filing an amended return. "

I forgot about this part. In this case I would try and get the tax bill for year of purchase as this poster suggested and then use the assesed values for land and improvements to calculate a ratio to apply to the original purchase price to calculate the basis in the 35 acres.

If they sell the house within 2 years you can then go back and amend for the 121 exclusion, if the requirements in the regulation are met. I feel it's better to pay no tax, rather than a low tax, if the law allows it. When amending I would be sure to attach a copy of this regulation to the 1040X, with the appropriate paragraphs highlighted. Please note that the reg gives an example of 29 acres being split off and sold. I'd be comfortable using this for 35 acres myself. Your mileage may very.

If the house doesn't sell within 2 years of the land you can't go back and amend for the exclusion. I'd still go with trying to find an old tax bill. The client may have to contact the taxing authority for a copy. Around here the town or county maintain copies of real estate tax bills on file for many...many years. This is of course, assuming your taxing authorities show assessed values for land and improvements on their tax bills.

[ajuroff]

My (or this clients) taxing authority does not show assessed values for land and improvements on the tax bills. The Equalized Value in '94 was 25,700, which I believe is roughly half of what could possibly be the sale value. (??) I believe this is before they used Taxable Value when basing taxes. The client did fax me a copy of the tax bill, the agreement for the sale of real estate as well as the appraisal from when she first purchased the house and 40 acres. Neither gives a clue as to the value of the land.

Pub 523 states that the sale of vacant land is not a sale of your main home unless (#3) The sale of your home satisfies the requirements for exclusion and occurs within 2 years before or 2 years after the date of the sale of the vacant land.

So, if the home does sell within 2 years after selling the land, this satisfies the requirement to exclude the sale of the land as well as the house. But, taxpayer would have to report the gain from the sale of the land first, pay the tax, then amend the return when (if) the house sells within 2 years. ughh..

[mgmea]

My (or this clients) taxing authority does not show assessed values for land and improvements on the tax bills. The Equalized Value in '94 was 25,700, which I believe is roughly half of what could possibly be the sale value. (??) I believe this is before they used Taxable Value when basing taxes. The client did fax me a copy of the tax bill, the agreement for the sale of real estate as well as the appraisal from when she first purchased the house and 40 acres. Neither gives a clue as to the value of the land.

Pub 523 states that the sale of vacant land is not a sale of your main home unless (#3) The sale of your home satisfies the requirements for exclusion and occurs within 2 years before or 2 years after the date of the sale of the vacant land.

So, if the home does sell within 2 years after selling the land, this satisfies the requirement to exclude the sale of the land as well as the house. But, taxpayer would have to report the gain from the sale of the land first, pay the tax, then amend the return when (if) the house sells within 2 years. ughh..

They don't even break down the equalized value by land and improvements?

[ajuroff]

Not at all.

Left side lists parcel number and Legal Description.

Right said lists Assessed Value: $25,700

Equalization Factor: 1.00000

State Equalized Value: $25,700

1 mill equals $1.00 per $1000 of SEV....yada yada....

No breakdown by land and improvements.

When we receive new assessments in the mail, it shows the change in SEV, Assessed and Taxable - the only reason I've ever noticed on mine were "to equalize".

[Bart]

My (or this clients) taxing authority does not show assessed values for land and improvements on the tax bills. The Equalized Value in '94 was 25,700, which I believe is roughly half of what could possibly be the sale value. (??) I believe this is before they used Taxable Value when basing taxes. The client did fax me a copy of the tax bill, the agreement for the sale of real estate as well as the appraisal from when she first purchased the house and 40 acres. Neither gives a clue as to the value of the land.

Pub 523 states that the sale of vacant land is not a sale of your main home unless (#3) The sale of your home satisfies the requirements for exclusion and occurs within 2 years before or 2 years after the date of the sale of the vacant land.

So, if the home does sell within 2 years after selling the land, this satisfies the requirement to exclude the sale of the land as well as the house. But, taxpayer would have to report the gain from the sale of the land first, pay the tax, then amend the return when (if) the house sells within 2 years. ughh..

Why not file the return assuming the house will sell and taking the sec 121 exclusion on the land. Then if the house does not sell go back and amend the return at that time to make the land sale taxable.

[mgmea]

Why not file the return assuming the house will sell and taking the sec 121 exclusion on the land. Then if the house does not sell go back and amend the return at that time to make the land sale taxable.

I wouldn't recomend this strategy. You would be preparing the return taking a position directly contradictory to Treasury Regulation 1.121-1, quoted here;

"C) Sale or exchange of vacant land before dwelling unit. If the sale or exchange of the dwelling unit occurs in a later taxable year than the sale or exchange of the vacant land and after the date prescribed by law (including extensions) for the filing of the return for the taxable year of the sale or exchange of the vacant land, any gain from the sale or exchange of the vacant land must be treated as taxable on the taxpayer's return for the taxable year of the sale or exchange of the vacant land. If the taxpayer has reported gain from the sale or exchange of the vacant land as taxable, after satisfying the requirements of this paragraph ((3) the taxpayer may claim the section 121 exclusion with regard to the sale or exchange of the vacant land (for any period for which the period of limitation under section 6511 has not expired) by filing an amended return. "

If the house didn't sell, when you amended the return you would be admitting to an underpayment on the original return caused by taking a position that negligently or willfully disregarded a Treasury rule or regulation. This would get the preparer a $1000 or $5000 fine without even having to go through an audit.

The OP could apply for an extension and hope the house sold before 10/15/2008. That would be my choice.

[mcb39]

Not at all.

Left side lists parcel number and Legal Description.

Right said lists Assessed Value: $25,700

Equalization Factor: 1.00000

State Equalized Value: $25,700

1 mill equals $1.00 per $1000 of SEV....yada yada....

No breakdown by land and improvements.

When we receive new assessments in the mail, it shows the change in SEV, Assessed and Taxable - the only reason I've ever noticed on mine were "to equalize".

Has he tried Court House or County Records. They go back forever.....

[LindaB]

Client purchased home and 40 acres in 1994 for $65,000. In 2007, client did a land split and sold off 35 acres for $157,500. The remaining 5 acres and home are still on the market. My problem, client has no idea on value of acres when purchased originally with home. Any idea how I can (or client) come up with a cost per acre amount for the original purchase?

Was any of the 40 acres tillable? Or was it swampy wetland, or forest? You might find out through a local farm bureau, feed mill, etc. if there is a real estate person who specializes in farm land, you might get some ideas there what the land itself would have been worth. I assume that prime farmland would be worth more than swamp. Also, is the house a 400 square foot shack or a 4000 square foot really nice place? That could give you an idea if most of the purchase price was for the house or the land.

(I too live in SW lower MI)

[catax]

I have used the adjacent vacant land exclusion twice for clients here in CA. My clients loved me in both cases. You have all done a great job in disussing this thoughly. One case my client filed paying the tax on the land, then we had to ammend once the house sold. One case the house sold the year before the land. I did explain the 121 exclusion on the 1040X on the ammended one. I didn't attach any other statements besides a corrected Sch D. I didn't have any questions from IRS in either case. Nena

[ajuroff]

My client came up with an amount for the acreage. AND they have someone putting an offer in on the house and remaining 5 acres. So, we are going to wait a bit to file the return. So am I correct that if they do sell the house in the next month, I can file the return with the 121 exclusion on the acreage? And would I need to put an explanation on next years return for the house and 5 acres with an explanation on the 121 exclusion?

Thanks to everyone for your opinions! Much appreciated!