Do I have to pay capital gains tax if I split the lot of my primary home and sell it separately?

Question

I will have lived at my primary home for 2 years in December. I want to get a lot line adjustment and basically sell my large backyard as a buildable parcel. I don't know if this helps, but my home came on three city lots and we are reducing it to two and selling them separately. It seems that since I am reducing, I shouldn't have to pay capital gains taxes. I am married and the value of both lots is less than the 500k allowance.

Answer 1

The exclusion on the sale of your principal home can include the sale of adjoining land, as long as the adjoining land was used as part of your main home. The sales of the home and the adjoining land have to occur within two years of each other.

So you will have to sell your home as well to get the exclusion. If you only sell the adjoining land without selling the house, that is not considered sale of a principal residence and the exclusion would not apply. You would pay capital gains tax of 15% on the increase in the value of the parcel of land you are selling.

If you do sell the land without selling your home, the original value of the land parcel that you sell reduces the basis of your house.

See page 3 of the reference cited.

Answer 2

Sorry, but selling the lot does not qualify for the sale of your primary residence. First of all, you don't have home on the lot, which you would need to do if you were selling your primary residence. What you could do though, is sell the lot that your house is currently on, and keep the backyard to build a new house on. That would qualify for the sale of your primary residence. And for the sale of your primary residence, you get to exempt capital gains up to $250,000 if you are single and $500,000 if you are married, and have lived in the home as your primary residence for 2 out of the past 5 years. If you decide to sell the lot, you will have capital gains on the sale of the lot, but you can reduce the capital gains by allocating a % of what you originally purchased the house and land for. The best estimator you can use is to look at a property tax bill and see how much your city/town is valuing your house for and how much they are valuing the land for. Say the city/town is valuing the house for $200,000 and the land for $100,000, and the reduction of the 3 lots to 2 lots would make the 2 lots equal in size, then the value of each piece of land would be $50,000 which would be 1/6 of the total value. You could then allocate 1/6 of your original purchase of the house and land to the lot that you sell. That would be your cost basis for that lot, and would reduce your capital gains for selling the lot.

Answer 3

If you lease your house you will have to declare the proceeds of the lease as income.You can offset that income with any expense generated by leasing. If the lease is in force when you sell it, there is a possibility the sale cannot be finalized until the lease period has expired. Capital gains are paid on the difference of what the property sold for and the original cost plus improvements. The question of how the tax law applies to leasing vs your occupancy is for the real estate lawyer.

Answer 4

You could use a portion of your $500K exclusion when you report the sale of the lot assuming that you utilized to lot as part of your main home property. For example you had a garden on the lot. IRS Pub 523 seems to say that you must also sell the main home with in a 2 year window before or after the sale of the lot. I seem to recall a tax law court that would disagree with that assertion. However you would only get a total of $500K exclusion for both the lot and the main home when ever the main home sold. So there needs to be some thought as to what your future plans may be. If you plan on living in this home for the rest of your life, take the exclusion and will the home to your kids. They will avoid any capital gains tax. Also you might wish to give consideration to how much gain is involved in both the home and the lot. Perhaps the long term CG tax on the lot would be better now and take the $500K exclusion later. Wouldn't it be nice if this were simple?

Answer 5

Yes, you will have to pay CG tax on this. Not sure where you get the idea that you don't. This does NOT qualify for the exclusion of the gain on your principal residence as you are not selling your principal residence!

You'll have to determine the cost basis for the subdivided lot. You may need to research the value of similar lots or use a pro-rata portion of the land valuation based on the lot size. Once you do that you'll pay CG tax on the difference between the net sale price and the cost basis. Since you've owned it for over 1 year it will be taxed as a long-term CG.

Don't forget to adjust the basis downwards for the remaining portion of your property! That will be necessary when you sell it off as the reduced basis will affect the CG position of the remaining property at sale time.

Since this isn't property held for investment it won't qualify for like-kind exchange treatment.

Answer 6

In the US, the answer is "Yes." But calculating the 'basis' of the lots can leave a lot to the imagination, if you catch my drift. You want the basis to be as high as possible since the gain = selling price less basis.
You might want to look into a 'Like-Kind-Exchnage." What are you planning to do with the money? If you are investing it, I beleive you can 'exchnage' the lots for REIT shares without current tax obligation (its deferred). If you are spending it on home improvements, that might be a like kind exchange as well (consult a tax professional). If you are blowing it on a a vacation or something alomng those lines, then tax deferral is probably not an option.

Answer 7

Wow! thank you! I was asking myself the same question today