Selling land can feel like a cumbersome task, especially when you factor in taxes. That’s why Land Resellers would like to provide you with some important tax information to be aware of if you’re planning on selling your land in the future.
Federal Capital Gain Taxes
According to the IRS, land is considered a capital asset. Generally, when you sell your land for more than you paid for it, you will end up with a capital gain. If you sell your land for less than you originally bought it, you will have a capital loss. Keep in mind that there are special rules for capital assets if you acquired land as a gift or inheritance. Furthermore, capital gains or losses are ranked as either long-term or short-term. If you own land for more than one year before selling it, this would be considered a long-term capital gain or loss.
If you own land for a year or less, it’s considered a short-term capital gain or loss. The taxes you pay will depend on this net gain or loss. For example, the amount of taxes you own for a long-term capital gain is determined by the total income from the sale. The rates could be 0%, 15%, or 20% depending on your individual income bracket. However, it’s important to note that capital gain tax brackets are not the same as personal income tax brackets, even though your overall income still counts.
Short-term capital gains are taxed as part of your ordinary income. This means that regular income tax brackets of 10% - 37% apply. However, depending on where your land is located, you may also be liable for capital gain taxes at state level. Proceeds from the sale must then be reported on your federal and state income tax returns for the year in which you sell your land.
Net Investment Income Tax
Depending on your individual income, you may also be subject to a net investment income tax (3.8%) on your capital gains from a land investment. Single taxpayers can make up to $200,000 in modified adjusted gross income before this tax applies. Married couples filing jointly can make up to $250,000. Net investment income tax also applies to distributions of investment income above certain thresholds from estates and trusts.
Section 121 Personal Residence Exclusion
Suppose you’re selling land that contains your principal residence. In that case, you may be able to avoid a certain amount of capital gain from your tax liability depending on how you file: $250,000 for single taxpayers and $500,000 for married couples filing jointly. However, you must have owned and lived on the land as your primary residence for at least 2 years out of the past five years.
Section 1031 Tax-Deferred Exchange
If you’re planning on selling your land and purchasing another property of equal or greater value, you have the option of deferring capital gains on the sale. This allows you to delay payment on the gain until the replacement land is sold. Why? As long as you are reinvesting the gains into a new property, your overall finances have not changed. If you decide to continue selling property and reinvesting in another, you can defer the tax. However, it’s important to note that this deferment is not eliminated. Depending on the year you sell your reinvestment, you could end up paying higher tax rates on deferred gains if there are changes to the tax code. You should also take into consideration any long-term appreciation or depreciation of any new property that you purchase.
Land Resellers
In summary, the best ways to handle taxes on a land sale will depend on a wide variety of factors such as how much your land is worth, your income, whether it will be used for agricultural purposes or if your primary residence exists on it. Additionally, state tax rules often differ from federal ones and may not be the same for every state. That’s why we urge land sellers to consult a qualified tax professional who can review your individual circumstances and provide you with the best advice for your specific situation.
At Land Resellers, we make the process of listing and selling land easier and more affordable compared to traditional real estate websites. With the ability to list your land by map, state, or county, you’ll love the ability to connect with thousands of potential buyers with listings that can be uploaded for instant digital advertising in just minutes. To learn more about how we can take your land listings to the next level, and maintain a competitive edge, visit our online marketplace to get started today!