We are working on the extension for our 2020 return, do we not include the land sale on the extension request since it will be recorded with the sale of the primary residence later this year? If we report it in the extension, it will appear as if we have tax owing that needs to be paid now, at least partially, from what I can tell. Thank you again.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.
If you are confident that you'll sell the main home before October 20 then don't include the vacant home sale gain in your computation of estimated tax due. The risk here is that if you do have to report the gain on the return because the home does not sell in time and you've significantly underpaid the tax due on your estimated return you'll have interest, late payment penalty and the extension might even be determined invalid and a late filing penalty applied. So if you have some doubt as to whether you'll get the sale done in time, pay enough with the estimated return such that you won't need to pay that extra interest and penalty should you have to include the gain on the 2020 return. Overpaying it just means you get a refund when the return gets filed.We are working on the extension for our 2020 return, do we not include the land sale on the extension request since it will be recorded with the sale of the primary residence later this year? If we report it in the extension, it will appear as if we have tax owing that needs to be paid now, at least partially, from what I can tell. Thank you again.
We are confident that the main home will be sold before that time. Thank you again!If you are confident that you'll sell the main home before October 20 then don't include the vacant home sale gain in your computation of estimated tax due. The risk here is that if you do have to report the gain on the return because the home does not sell in time and you've significantly underpaid the tax due on your estimated return you'll have interest, late payment penalty and the extension might even be determined invalid and a late filing penalty applied. So if you have some doubt as to whether you'll get the sale done in time, pay enough with the estimated return such that you won't need to pay that extra interest and penalty should you have to include the gain on the 2020 return. Overpaying it just means you get a refund when the return gets filed.
Thank you so much again.If you are confident that you'll sell the main home before October 20 then don't include the vacant home sale gain in your computation of estimated tax due. The risk here is that if you do have to report the gain on the return because the home does not sell in time and you've significantly underpaid the tax due on your estimated return you'll have interest, late payment penalty and the extension might even be determined invalid and a late filing penalty applied. So if you have some doubt as to whether you'll get the sale done in time, pay enough with the estimated return such that you won't need to pay that extra interest and penalty should you have to include the gain on the 2020 return. Overpaying it just means you get a refund when the return gets filed.