Land Development question and taxes

[uniqueuser]

Texas

I have an opportunity to buy a significant piece of land with a house on it. My goal is to purchase entire plot, subdivide, sell off 75% of land and keep house.


How does this work with taxes? Other info:

Price 1,000,000
Sell price of land 900,000


Do I pay taxes on the 900k vs. a weighted average of land sold with regards to purchase price? Or do I pay no taxes b/c i collected less than i paid.



thank you - this will either be a vacation home or a rental and will eventually be my personal home in 20 years.

 

[LdiJ]

Texas

I have an opportunity to buy a significant piece of land with a house on it. My goal is to purchase entire plot, subdivide, sell off 75% of land and keep house.


How does this work with taxes? Other info:

Price 1,000,000
Sell price of land 900,000


Do I pay taxes on the 900k vs. a weighted average of land sold with regards to purchase price? Or do I pay no taxes b/c i collected less than i paid.



thank you - this will either be a vacation home or a rental and will eventually be my personal home in 20 years.

You will pay taxes because your basis in the portion you will be selling will be less than the whole amount you purchased

Example:

Home is worth 100,000
Land is worth 900,000

You will be subdividing the land into 4 parcels. One parcel stays with the house and you sell the other three. Each parcel is worth 225,000 (900,000 divided by 4). You are selling three parcels with a total basis of 675,000. If you sell those 3 parcels for 800,000 you would have a capital gain of 125,000 and that is what you would pay capital gains tax on.

This is just an example to show you the theory. Your numbers will vary.

 

[uniqueuser]

Thank you


You used a straight line valuation of value regarding the three lots. Does this have to be done or am I allowed to assign a value to this?


I am completely fine paying taxes on my gain, but i need to understand how to structure before I close this purchase.


My goal would be two split into three parcels. At straight line my profit would be about 500k...and i'd be stuck with a 400k house so the house would actually cost me 400k + taxes on 500k -500k.

Reality is that empty land is worth more than the house i.e. empty parcels are worth 1.5x and 1.5x of straight line and the house is worth .5x. Is there a way to show this?


Thank you

 

[HRZ]

You can depreciate a home held for investment purposes, but not land .

I suggest you get some local tax help.

 

[uniqueuser]

You can depreciate a home held for investment purposes, but not land .

I suggest you get some local tax help.

Definitely trying right now...my accountant is not answering me and I'm on the hot seat



Thank you!

 

[LdiJ]

Thank you


You used a straight line valuation of value regarding the three lots. Does this have to be done or am I allowed to assign a value to this?

If the lots are all to be the same size and basically the same features then yes, you have to use a straight line valuation. It has to be proportional.
If the lots are different sizes they would need to be proportional based on their size. If one lot had better features than another, even if the same size, then you could vary that based on a reasonable value. However, the most important thing is that the land and house that you keep for yourself absolutely has to be valued proportionally.

I am completely fine paying taxes on my gain, but i need to understand how to structure before I close this purchase.

My goal would be two split into three parcels. At straight line my profit would be about 500k...and i'd be stuck with a 400k house so the house would actually cost me 400k + taxes on 500k -500k.

Reality is that empty land is worth more than the house i.e. empty parcels are worth 1.5x and 1.5x of straight line and the house is worth .5x. Is there a way to show this?


Thank you

The house is not worth 400k. The house is worth 100k and the land it sits on is worth 300k. So yes, you would be keeping a parcel with improvements that is worth 400k. You do not get to shift some of that value/basis to the other parcels.

 

[HRZ]

THe house might have negative value per some of your logic...but I sure would not approach it that way for a home I expected to hold for about 20 years as an investment /rental properly and quite possible a home I intended to upgrade while in rental service ( you did not address that possibility, I know )

And land held at least one year gets capital gains treatment .

TAx and legal advice for a nvestment purposes is generally deductible ....get some ....

BE sure you can subdivide as you plan