Personal Residence 1 acre - subdivided

[S T]

A question that I am not familiar with, have done some research

Taxpayer owns a personal residence on 1 Acre - a potential buyer approached to purchase only the back portion of the property roughly .45 acres which is all forest - seems it would require sub-division.

Question is - if taxpayer sells the .45 acres of the forested area, it becomes investment property and subject to capital gains. - Schedule D

2nd Question - is how do we arrive at the allocation for the original purchase price which did include the dwelling (personal residence) and the land - Use the tax assessor's value for land?

If taxpayer sold entire property with personal residence it would qualify for the 121 exclusion.

Looking for some guideines

Thanks

Sandy

[taxea]

Before spending any of my time I would have client determine whether the prop can be legally subdivided. If yes..after that is done the basis would be the allocation of sq ft using the FMV (amount client paid for it) of the land at the time of original purchase. Assessor's value rarely matches FMV.

[Gary2]

I may be making things overly complicated, but in general it's possible that the FMV of the land doesn't match a square-footage allocation. For example, in MA it's quite possible to divide a lot into two lots, one of which is buildable and the other of which isn't.

I wouldn't worry about this aspect unless it's clearly being used to manipulate income.

[S T]

Thanks Gary 2, I don't want to overly complicate issues, however, if it can be sub-divided I have to allocate an original cost purchase just to this portion of the land value, and then of course the remainder of the land with the personal residence.

Just not quite sure, how to approach this - I was thinking of using the Tax Assessors figures for Land vs Dwllg - to arrive at percentages to assign to land and to dwelling.

The .45 Acres land could have a sales price of approx $ 100K - there have been a few inquiries unsolicited.

Sandy

[Roland Slugg]

I would recommend to the client that he hire a qualified appraiser to do an after-the-fact appraisal of the land's two portions, based on it's original cost.

[Burke]

The basis of the land would be at its original cost, not its FMV today. So I don't see any problem allocating the original land value on an acreage (or percentage of acreage) basis.

[taxea]

I agree with Burke.

[Gretel]

I also agree with a proration using the assessment, if possible at time of purchase. Hiring an appraiser of course would be the safest way, it also depends on the $$ involved.

What I learned this year is that there is a huge difference (appraisers bill) between getting an appraisal and an evaluation. I believe for tax purposes the evaluation is sufficient. In my neck of the woods it's $5,000 vs $1,000.

[Burke]

I also don't see any problem using the original tax assessment for the land value (when it was purchased.) This should be available from the city/county.

[Gary2]

I should clarify that I don't see a problem with using the original purchase price and per cent of land sold for the calculations. I was just pointing out possible options, though it's rare you'd want to use them.

As for using the original assessment, that would depend highly on local practice and timeliness. In MA, assessments have to be updated every three years, but even then, a volatile real estate market could produce a large swing in land to building ratios. I believe there are still jurisdictions where ten years is the norm, so unless you're sure that the value ratios have remained stable or the assessment was dated to about the same time, I'd consider looking for an appraisal.

[Burke]

As for using the original assessment, that would depend highly on local practice and timeliness.

Agreed. In VA, at least in my locality, they are updated every year (at 100% valuation).

[taxea]

Here is how I would calculate it:
assessed value total at time of purchase
sq ft of house divided by total assessed value= %of basis to house
100 minus house % = land percentage

total property purchase amount x land %= land FMV at time of purchase
land FMV divided by total sq ft of land= Basis per sq ft

Basis of sq ft x number of sqft being divided from total sq ft (i.e. total sqft 10000. amount being subdivided 5750. 5750 is x by basis per sq ft amount.gives you the basis of sectioned off land.

[S T]

Thanks all that posted. I am going to use the year of purchase and next year property tax assessment to calculate the percentage of land and bldg values (the values are separated on the tax bill) and apply to the purchase price, and then add the appropriate improvement costs if any. And also calculate the sq ftg cost on the land so I can assign to dwllg versus the other portion of the land associated with the land that might be sub-divided and sold.

Sandy

[Burke]

Just a caution. Advise your client to sell the land BEFORE it is sub-divided. Let the purchaser do that. Because once land is subdivided, unless it falls under all the regs of Sect. 1237, it will be treated as ordinary income realized, not capital gains.

[taxea]

Sandy..client's true original basis is the price he paid for the property. FMV and assessed value are not the same. Assessed value is frequently lower than the purchase price even the year after the purchase. In an effort not to short-change the client I would recommend you pro-rate with the purchase price.