Answers to Frequently Asked Land Selling Questions

Selling Vacant Land Tax Implications

Are you looking to sell vacant land? It is always an exciting time and getting value for your investment is something ideal. However, in that process, something that people forget at times is that there are tax implications that must be followed. These taxes must be followed and shouldn’t be evaded. Keeping up with taxes is essential and different sales will have different tax implications. Here are some of the tax implications you can expect when property taxes are involved.

Federal Capital Gains Tax

According to IRS guidelines, anything you possess is a capital asset, including your home or property, furniture, and stock and bond investments. A capital gain occurs when you sell a capital asset for more than you paid for it. You incur a capital loss if you sell it for less than its original price. This net gain or loss determines your tax burden. The amount of tax you owe on long-term capital gains is determined by your total income from all sources. Depending on your income bracket, you’ll pay 0%, 15%, or 20% of your income in taxes. The sale proceeds must be recorded on your federal and state income tax returns for the year in which the transaction occurred.

Net Investment Income Tax

You may be subject to a 3.8 percent net investment income tax (NIIT) on capital gains, dividends, or income from investment real estate home, depending on your overall income. Before this tax, single taxpayers can earn up to $200,000 in modified adjusted gross income (MAGI). The threshold for married couples filing jointly is $250,000.

Section 121 Personal Residence Exclusion

You may be eligible to deduct a specific amount of capital gain from your tax liability if you sell a ranch or farm that is also your primary residence, up to $250,000 for individuals and $500,000 for married couples filing jointly. You must have owned and resided in the home for at least 24 months out of the previous 60 months as your principal residence. If the farm is part of a bigger property, you can combine it with more land to boost your tax-free earnings.

Section 1031 Tax-Deferred Exchange

You have the option to delay capital gains taxes on a sale if you plan to sell one property and buy another of equal or greater value. This permits you to defer the gain payment until the replacement property is sold. The notion is that your overall finances will not alter if you reinvest your winnings in a new property. Keep in mind that the tax liability is just deferred, not abolished.

Section 664 Charitable Remainder Trust

Another way to minimize capital gains tax is to put assets into a charitable remainder trust, which removes them from your estate’s worth. Because the trust is tax-exempt, it can then sell the assets tax-free and invest the earnings in a way that gives you and other beneficiaries long-term income. This is a great option to supplement your retirement income rather than simply selling the land and paying taxes on it.