Taxes Involved When Selling Land

When The Time Comes To Sell Land

Do we need to pay tax for selling land? Whether it is for business or personal use, owning property is a dream of many across the country. However, depending on the circumstances, landowners may find they no longer have use for their land or may wish to sell land and buy something else. Whatever reason you decide to sell your land, there might be tax consequences when it comes time to file your yearly return.

This article takes a look at the different taxes involved when selling land. Of course, this isn’t an exhaustive list, and sellers should consult with a tax professional to find which options work best for them.

Let’s get started.

Federal Capital Gains Tax on Land Sales 

According to BankRate.com, a capital asset is an item you own for business or personal purposes, such as a car, a home, a baseball collection, or vacant land. When you sell a capital asset, you incur a capital gain, or a capital loss, depending on the price paid and the price sold. Capital gains have a special tax rate, and capital losses can often reduce the tax owed.

What does this mean for you as a seller? Many scenarios apply to capital gains or losses, such as the length of time owned, whether the asset was a gift and your unique tax situation. Briefly, capital gains are classified as long-term, meaning the asset is owned longer than a year, and short-term, which is held for less than a year.

The tax code has undergone significant changes in recent years and may well do so again under a new administration. Also, depending on where you live or where the land you sell is located, you could be liable for state capital gains taxes as well.

Let’s move on and look at other taxes involved when selling land.

Net Investment Income Tax

The net investment income tax (NIIT), often called the Medicare Surtax, is based on your overall income and can add up to 3.8 percent on your capital gains from real estate. Single taxpayers making up to $200,000 annually are immune to this tax, while married couples filing jointly can make up to $250,000.

To further explain the NIIT, a simple land transaction breakdown is as follows: Landowner sells a parcel of land for $75,000. To find out the net investment income tax, multiply the sales price of $75,000 by 3.8 percent, and you get $285. This isn’t a large amount but could certainly increase on higher-priced land transactions.

Section 121 Personal Residence Exclusion

If the parcel of land you are selling is also your primary residence, you may be able to deduct up to $250,000 for single and up to $500,000 for married couples of capital gains. Residency restrictions apply, and you must have lived in the house for two out of the last five years to receive this benefit.

Section 1031 Tax-Deferred Exchange

This tax benefit is ideal for those that want to use the proceeds of one transaction to buy another piece of real estate. The requirements are that the new purchase must be of equal or greater value, and you can defer the capital gains on the first transaction until the subsequent purchase is sold.

The logic behind this rule is that you are reinvesting any gains and are not changing your overall wealth. One thing to consider is even if you keeping selling and reinvesting in real estate; eventually, the tax will have to be paid.

Section 664 Charitable Remainder Trust

Another way to save on capital gains made from a real estate transaction is to place the proceeds from the sale in a charitable remainder trust. A charitable remainder trust is an irrevocable trust designed to reduce the tax burden of land sellers by paying beneficiaries of the trust for a specified period and then donating the remaining monies to a specified charity.

The benefits of a charitable remainder trust are that the trust can provide regular income for a specified time while allowing for philanthropic pursuits at the same time.

Selling Land Taxes

As with any of these tax strategies, some or none of them may apply to your situation. To find out which of these might work best for you, consult with a tax professional who specializes in land ownership.

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