B&T Books N' Taxes

[cpeters]

Have a client who owns two (2) pieces of property that JOIN each other. One is a log cabin, very habitable, that is, water, sewer, electricity, heat, etc. Client plans to sell the cabin property and within two (2) years or less sell the primary home in which they live in.

Since they are joined together they want to take the $500,000 exemption on each piece of property. Neither piece of property will exceed this limit in the sale.

It seems that I have read some where that such is possible.

Would appreciate any light that can be shed on this and any precautions, such as, does it make any difference which piece of property is sold first? Incidentially, the couple have lived in both pieces of property more than five years...........just not at the same time, obviously.

Ain't this fun !!!!

[Mark Goldberg]

Answer

First they have to sell the house which they have resided in as their primary residence for 24 months out of the 5 years preceding the sale. Then after they move to the other hosue for 2 years they can sell that one.

[Bees Knees]

To go along with what Mark said, the fact that each property joins each other is irrelevant. The fact that is important is that the taxpayer used the cabin for 2 out of the last 5 years as the principal residence, and used the home 2 out of the last 5 years as the principal residence. Both have to have been used at separate times as the principal residence for at least 2 out of the last 5 years to qualify for the exclusion.

The other test that may cause a problem, however, is that when gain is excluded on one home, gain cannot be excluded on another home during the two-year period ending on the date of sale of the first home. So to exclude gain on both homes, timing of the sales are important.

[Lion]

Sale of Home

You might have been thinking of selling a home and within two years selling adjacent land. But, that's not your situation. As the others stated, you must meet the principal residence for two out of five requirement at the time of sale of each AND you cannot use the $500,000 MFJ exclusion more than once every two years. So, be careful if you think both sales might happen within two years; you might want to reconsider your timing.

[cpeters]

Vacant Land Sale & Exclusion

I may have created confusion about what my client is trying to accomplish within the tax law. First, property No. 1 (about 20 acres) is adjacent to property No. 2 and both are owned by the same people. Property No. 2 is the personal residence. Property No. 1 has an old rundown (1840's) log cabin, never used as a home since owned by current principals even though it contained facilities, but used as a storage building and firewood has been taken from the land to heat the primary residence. Both properties have been owned by the current principals for the past 27 years or more.

Can Property No.1 be resurveyed to include two (2) plats, one for the cabin and an acre of land adjacent to Property No 2 and the other plat to include the remaining 19 acres adjacent to Property No. 2? In other words, two plats, both adjoining Property No. 2?

For purposes of taxation the 19 acres of vacant land would become excluded property since it is adjacent to and has been used with Property No. 2. The cabin and an acre of land might be subject to taxation since it is not vacant land only.

So, when the main home is sold (Property No. 2) the 19 acres of vacant land (Property No 1) will be included in the exclusion of $500,000 for joint return. The cabin and one acre of land might be subject to taxation.

All this assumes the sale of Property No 1 will take place two years before or two years after the sale of the personal residence (Property No 2).

I would really appreciate any comments and suggestions about this situation so I can advise my client.

[Guest]

See no problem

You Parcel #1 and you have to pay capital gains. You sell Parcel #2 and you take section 121 exclusion, go back and amend taxes for parcel #1 sale claiming section 121 exclusion because sale took place w/in the 2 year time period on adjacent land sale.

[Snaggletooth]

Lonesome River Band

Peters, priority one is to speak of Ferrum, VA and Tim Austin, a guy I know who played rhythm guitar and began the "Lonesome River Band" in the 1980s, which became one of the premiere bands in all of bluegrass. Around 1997, Tim gave up the grueling road show while his band continued to be a dominating force in Bluegrass. Tim and his wife turned the "good life" (i.e. not travelling) and began a Recording Studio in Ferrum -- "Doobie Shea Records." Perhaps you know of these folks -- if so, tell him "Big Ron" says Hello. Would love to get up there and see them. Doobie Shea has been incredibly successful as a recording studio - Tim was one of the most respected names in Bluegrass when he quit touring.

Ah yes, now that the important stuff has been said, let's consider your case of "Russian Cabin Roulette." or "Musical Cabins" if you prefer.

Your redefinition of the situation brings up three big problems nonexistent with your initial post. Let's get started:

1) You mention that Property #1 is owned by two different people. I hope these two are man and wife, or some other recognizable co-habitation arrangement. Elsewise, how can this property be Primary Residence for both parties at the time of sale? Remember, the 2-year requirement CANNOT have any part of the two years running concurrently with Property #2. If your "two different people" are, in fact, not co-habitants, only ONE of them may claim the exclusion.

2) Property #1 is in 1840s - build out status, i.e. uninhabitable. This is going to cost the taxpayer big bucks to render the cabin liveable to the extent that he can live in it for two years. Since the gain would be at capital gains rates, it would probably be cheaper to just pay the taxes rather than improve the cabin just for the purposes of living in it, PLUS the inconvenience of HAVING to live in it. The entire economic spectrum must be considered for clients, not just the tax effects. If these improvements may significantly enhance the selling price MORE than their cost, then this would be another economic factor.

3) It would be a considerable stretch-of-the-imagination to try to qualify the 20 acres of land as part of the "residence." I have seen situations where this could be done, most commonly when someone actually lives in the house and somehow manages to maintain a 20-acre "yard." These situations are not very common. It is clear in your case that the 20 acres were never intended for use as a "yard" for a residence, in fact it's much more likely that in the past the owners have taken associated expenses as a deduction -- either on Schedule F or on 4952. There will be others who will post in response that will be more optimistic about exempting the 20 acres, but I will stand on the merits of my argument above.

I agree with Beeswax that there is nothing positive (or negative) about these properties being adjacent -- at least not for purposes of exemption of a personal residence.

Good topic, Peters, and I'll look forward to more responses from others on this one. Welcome to the Board.

Regards, Ron Jordan Manchester, TN

[Jesse]

Not sure if I'm understanding correctly?

First of all, I get the jist your people are married?

Next, the way I understand the scenario is that the second parceI is the primary residence for which the section 121 exclusion to apply. The first parcel to be sold is adjacent and was used for personal purposes with the inhabitable cabin used for a storage shed, so wouldn't the 2 year timeline still apply with one sale being for the home they live in and the adjacent land having a storage shed(the old cabin). Or must the land be absolutely vacant for this rule to apply?

[cpeters]

Jesse, You hit the nail squarely on the head! That's what I'm trying to determine.

[OldJack]

Vacant land. The sale of vacant land is not a sale of
your main home unless:

1. The vacant land is adjacent to land containing your
home,
2. You owned and used the vacant land as part of your
main home,
3. The sale of your home satisfies the requirements for
exclusion and occurs within 2 years before or 2
years after the date of the sale of the vacant land,
and
4. The other requirements for excluding gain from the
sale of the vacant land have been satisfied.

If these requirements are met, the sale of the home and the
sale of the vacant land are treated as one sale and only
one maximum exclusion can be applied to any gain.

It appears to me that your client meets all 4 conditions to exclude under §121 by amending the first return after the sale of the last parcel.

[JON]

See Oldjack

Bingo-"adjacent does mean something...........

[cpeters]

Thanks Guys! Are we saying the fact the vacant land has an old non-habitable cabin (last inhabited 1965) on it is irrelevant?

Or.........to be perfectly safe about this, should the non-habitable cabin be surveyed with about 1 - 1 1/2 acres and make it a separate parcel so when sold pay what ever the capital gains tax might be? And..........the remaining acreage of vacant land excluded from taxation since it is adjacent to the main home and would come under the $500,000 exclusion for a joint return? I really don't want my client to go through the extra expense of surveying, plats, deeds, etc. if it can be avoided.

All of you fellows have been terrific in helping me with this situation and I really appreciate your time, thoughts and advice.

[jainen]

"vacant" not "unimproved"

The word is "vacant," not "unimproved." Vacant doesn't mean "without a structure" it means "without an occupant." And 20 acres isn't too big for a homestead, so I say you can sell it with the house or split it off separately two years before/after, but the total gain is subject to a single 250/500 exclusion, and you can quote me.

[Jesse]

Originally Posted by Pub 523, Sale of Your Home”, Page 3:

Vacant land. The sale of vacant land is not a sale of
your main home unless:

1. The vacant land is adjacent to land containing your
home,
2. You owned and used the vacant land as part of your
main home,
3. The sale of your home satisfies the requirements for
exclusion and occurs within 2 years before or 2
years after the date of the sale of the vacant land,
and
4. The other requirements for excluding gain from the
sale of the vacant land have been satisfied.

If these requirements are met, the sale of the home and the
sale of the vacant land are treated as one sale and only
one maximum exclusion can be applied to any gain.

It appears to me that your client meets all 4 conditions to exclude under §121 by amending the first return after the sale of the last parcel.

If it meets the definition of vacant I would say it indeed is excludable under section 121 if all other qualifications are met w/in the two year period.

Vacant:
1. Containing nothing; empty.
2. Without an incumbent or occupant; unfilled.
3. Not occupied or put to use.
4. Not filled with any activity.

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