SELLING PART OF PRIMARY RESIDENCE

[KILGARIFF]

I BOUGHT 2 ACRES ON A LAKE, BUILT A HOME AND HAVE A TOTAL OUT OF POCKET EXPENSE OF $285,000.00. I HAVE OWNED THE PROPERTY FOR 5 YEARS. RECENTLY PURCHASED ADJOINING PROPERTY (NOT LAKE FRONT) AND WISH TO PUT PART OF MY ORIGINAL 2 ACRES WITH IT TO MAKE IT LAKE FRONT. IF I SELL IT FOR A PROFIT, WILL I INCURR TAX AT SALE OR WILL I ADJUST VALUE OF PRESENT HOME? HOW AND WHO WILL VALUE THE PROPERTY I SELL WITH THE NEW LOT?

 

[Taxguy]

>>IF I SELL IT FOR A PROFIT, WILL I INCURR TAX AT SALE <<

Yes.

 

[loku]

Subdivision of land

If you sell part of the land on which your main home is located, but not the house itself, you cannot exclude any gain you have from the sale of the land. When a sale is made of parts of property purchased as a unit, as in your case, a subdivision of real estate, allocation of the total basis is required.

So what you have to do is allocate a portion of the original cost of the land to the portion sold. The larger the portion you allocate, the smaller your gain on the land; however, the IRS can question a too large allocation.