Tax Exclusion for Vacant Land Around Home

[JamesWhitney]

I sold a piece of subdivided land next to my primary residence in 2020. I would like to utilize the $250,000/$500,000 home sale exclusion which we do qualify for. We own and have occupied our home as our principal residence for the last 4 years. However, we won't be selling the primary residence until sometime this year. We would like to use the proceeds from the sale of the land to purchase another piece of land (at the same price as the sales gain or higher) and build another house there, then move and sell our current home. Is there a way to defer the capital gain from 2020 in order to use the home exclusion in 2021? Thanks in advance.

 

[FlyingRon]

The land isn't eligible for the capital gain exclusion no matter when or what you do. If you've already sold it (and received the proceeds), it's too late to use any of the other deferral schemes. There's no rollover-replacement rule (not for decades) for your primary residence. That was swapped for the exclusion. There's an exchange deferral, but you can't take control of the money between selling the asset you're going to roll it into (and it has to be like-kind, so you can't use it to buy a bigger personal residence).

 

[Taxing Matters]

I sold a piece of subdivided land next to my primary residence in 2020. I would like to utilize the $250,000/$500,000 home sale exclusion which we do qualify for.

I disagree with FlyingRon that there is no way the land may qualify for the capital gain exclusion. The sale of vacant land that sits next to your personal residence can indeed qualify for the capital gain exclusion if certain requirements are met, including that you must sell the home itself within 2 years of the date you sold the vacant land and you have to treat the sale of the vacant land and the sale of the personal residence as a single transaction. As a result, that that $250,000 limit ($500,000 if you are married and filing a joint return) will be the limit that applies to the combined gain from the sale of both properties. The full set of requirements you need to meet to qualify are explained in IRS Publication 523 on page 5.

If you don't qualify to use the exclusion as described in the publication then you'll be stuck paying tax on the gain on the sale of that vacant land. You already sold the vacant land and got the proceeds so no like kind exchange is possible now. Moreover, you cannot do like kind exchanges where the either the property you are giving up or the property you are getting in exchange are your personal residence. There is no other gain defferal provision available to help you with this.

 

[JamesWhitney]

I disagree with FlyingRon that there is no way the land may qualify for the capital gain exclusion. The sale of vacant land that sits next to your personal residence can indeed qualify for the capital gain exclusion if certain requirements are met, including that you must sell the home itself within 2 years of the date you sold the vacant land and you have to treat the sale of the vacant land and the sale of the personal residence as a single transaction. As a result, that that $250,000 limit ($500,000 if you are married and filing a joint return) will be the limit that applies to the combined gain from the sale of both properties. The full set of requirements you need to meet to qualify are explained in IRS Publication 523 on page 5.

If you don't qualify to use the exclusion as described in the publication then you'll be stuck paying tax on the gain on the sale of that vacant land. You already sold the vacant land and got the proceeds so no like kind exchange is possible now. Moreover, you cannot do like kind exchanges where the either the property you are giving up or the property you are getting in exchange are your personal residence. There is no other gain defferal provision available to help you with this.

Do you know if anything needs to be filed with our 2020 Tax Return to show the sale of the vacant land? Or, do we wait until we file for 2021 to show the sale transactions for both properties? Or, do we need to file anything as long as we qualify for the home sale exclusion of the gain?

 

[Taxing Matters]

Do you know if anything needs to be filed with our 2020 Tax Return to show the sale of the vacant land? Or, do we wait until we file for 2021 to show the sale transactions for both properties? Or, do we need to file anything as long as we qualify for the home sale exclusion of the gain?

Did you get a Form 1099-S for the sale of the vacant land? And when will you sell the home?

 

[JamesWhitney]

Did you get a Form 1099-S for the sale of the vacant land? And when will you sell the home?

I did not get a Form 1099-S

 

[Taxing Matters]

I did not get a Form 1099-S

And do you know when you will sell the home?

 

[JamesWhitney]

And do you know when you will sell the home?

The home will be sold between August - November 2021

 

[JamesWhitney]

I did not get a Form 1099-S

Correction on the 1099-S. I looked through the closing docs again and there is a Substitute Form 1099-S - Proceeds from Real Estate Transactions that was included

 

[Taxing Matters]

Correction on the 1099-S. I looked through the closing docs again and there is a Substitute Form 1099-S - Proceeds from Real Estate Transactions that was included

Ok, then let's start here. The basic rule that the IRS uses is that home sales in which the gain is entirely covered by the gain exclusion of § 121 do not have to be reported on your tax return unless you get a Form 1099-S for the sale. If you get a Form 1099-S, you need to report the sale even though there is no gain on the sale after applying the exclusion.

The home will be sold between August - November 2021

This brings us to the next part, which is the rule for sales of vacant land next to your principal residence. As I mentioned before the sale of the vacant land can be combined with the sale of the home so that the combined sale can qualify for the gain exclusion. So if you meet the requirements in the publication that I linked earlier, you can get the exclusion to help you cover the gain from both sales. One of the requirements is that the two properties must be sold within two years of each other, which it appears you will meet.

Now comes the issue of reporting that. The rule that applies here is found in the tax regulations:

(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 (b)(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.​

​

Treas. Reg § 1.121-1(b)(3)(ii)(C). So, under that regulation, if you get an extension to file your 2020 return you can wait until October 15 to file and if the sale of the home occurs before October 15 you won't need to report the vacant land sale on that return. You'd instead just report the combined sale of the two properties on the 2021 return instead. However, if you don't sell the home before the deadline to file the 2020 return, you must report the vacant land sale as a separate sale on your 2020 return and pay the tax that results. Then when you file the 2021 return, you'd report the combined sale and then at that time amend the 2020 return to claim a refund of the overpaid tax.

 

[JamesWhitney]

Ok, then let's start here. The basic rule that the IRS uses is that home sales in which the gain is entirely covered by the gain exclusion of § 121 do not have to be reported on your tax return unless you get a Form 1099-S for the sale. If you get a Form 1099-S, you need to report the sale even though there is no gain on the sale after applying the exclusion.



This brings us to the next part, which is the rule for sales of vacant land next to your principal residence. As I mentioned before the sale of the vacant land can be combined with the sale of the home so that the combined sale can qualify for the gain exclusion. So if you meet the requirements in the publication that I linked earlier, you can get the exclusion to help you cover the gain from both sales. One of the requirements is that the two properties must be sold within two years of each other, which it appears you will meet.

Now comes the issue of reporting that. The rule that applies here is found in the tax regulations:

(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 (b)(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.​

​

Treas. Reg § 1.121-1(b)(3)(ii)(C). So, under that regulation, if you get an extension to file your 2020 return you can wait until October 15 to file and if the sale of the home occurs before October 15 you won't need to report the vacant land sale on that return. You'd instead just report the combined sale of the two properties on the 2021 return instead. However, if you don't sell the home before the deadline to file the 2020 return, you must report the vacant land sale as a separate sale on your 2020 return and pay the tax that results. Then when you file the 2021 return, you'd report the combined sale and then at that time amend the 2020 return to claim a refund of the overpaid tax.

Thank you so much. I really appreciate your expert advice and quick responses. Have a great weekend.

 

[Taxing Matters]

Thank you so much. I really appreciate your expert advice and quick responses. Have a great weekend.

Appreciate the thanks. Enjoy your weekend.

 

[JamesWhitney]

Appreciate the thanks. Enjoy your weekend.

Can you tell me what IRS Form is required to report the combined sale later this year?

 

[Taxing Matters]

Can you tell me what IRS Form is required to report the combined sale later this year?

If you sell your residence before the due date of the 2020 return, you'd report the combined sale on your 2021 return. You'd use Form 8949 and Schedule D. More details on how to report it is found in IRS Publication 523 starting on page 15.

 

[JamesWhitney]

If you sell your residence before the due date of the 2020 return, you'd report the combined sale on your 2021 return. You'd use Form 8949 and Schedule D. More details on how to report it is found in IRS Publication 523 starting on page 15.

Thank you so much again ;-)