Capital gain on real estate?

Question

I have a neighbor wanting to buy part of my farm land. Is the capital gains tax figured on the price I purchased it for ,or the total amount of the loan (intrest and bank fees)? I plan on having a new house built , will it help with the taxes?

Answer 1

Capital gains are figures on the DIFFERENCE between the sales price and adjusted basis.

The basis could be several things depending on how you acquired the property.

If you purchased the property, the basis is what you paid for it.

If it was given to you as a gift, the basis is what the adjusted basis of the donor.

If it was inherited, the basis is the Fair Market Value on the date of death.

Adjustments could include gift taxes paid, improvements to the property, easements, etc. They also include if property was owned jointly with right of survivorship.
As an example consider:

Home owned jointly by Husband and Wife

Cost:$100,000
FMV $300,000

Husband's Basis: $50,000
Wife's Basis: $50,000

Husband dies.

Wife basis is : $50,000 + $150,000 (1/2 of FMV at Husband's death) = $200,000.

Answer 2

Building a new house will have no effect on your taxes, although it will increase your basis in the part of the farmland you don't sell.

The capital gains tax on the sale is based on the selling price minus the price you paid originally for the portion of the farm that you sold. The loan, interest and bank fees have no effect on the c.g. tax.

Answer 3

The gain is based on the tax basis of the property. This is the probably price you paid. The outstanding loan is irrelevant.

Answer 4

If you bought a farm of some size, with or wihout buildings, your problem will be in identifying (estimating) how much of the total cost should be used as cost basis of the part you are selling. Good luck.