Sale Of Vacant Land

[cpeters]

I'd like to try this one more time and give a few more particulars. The approximately 20 acres that was sold in 2006 was part of the land on which our main home is located. In all it included approximately 32 acres. The Tax Book on page 6-20 states that if the land is adjacent to the land containing the taxpayer's principal residence and the taxpayer used the land as part of the residence and the residence is sold within two years before or after the sale of the vacant land it satisfies the requirements for exclusion. We currently have our home advertised for sale and believe it will occur within the time limits. Other ownership and use requirements are satisfied. Is my interpretation of Section 121 Exclusion correct? How should the sale of the land be reported on the 2006 tax return?

I sure am blessed to have you folks to guide me on this one! I really need you now!

[lbbwest]

Sale of Vacant Land

Report the land on D with gross amt of sale same as basis with a notation 121 exclusion. IF your home doesn't sell within the two year requirement you will have to amend 2006.

[Davc]

Actually, you report the sale as taxable and amend to take the exclusion if you qualify later by selling the actual residence.

[jainen]

I agree with Dave

>>report the sale as taxable and amend to take the exclusion if you qualify later <<

I agree with Dave on this. The vacant land is not eligible for exclusion unless and until the home is sold. If you think that will happen this summer you can put 2006 on extension instead of paying the tax and waiting to get it refunded. Otherwise you could be hit with a 20% penalty for substantial underpayment.

[Bill Tubbs]

concur with Davc

Sorry LBB, I have to agree with Davc on this one. Though I will admit that your approach would probably be "just fine" too.

Another option -- file a 6-mo extension and if the house sells by Oct 15, then it's a non-issue -- at that point you can safely use Sec 121 for the land as well.

Bill

[Gene V]

You guys are right, Reg.1.121-1(b)(3) and(4)Example 3. explains how to report the sale of vacant land before the residence is sold.

Example 3. In 1991 Taxpayer C buys property consisting of a house and 10 acres that she uses as her principal residence. In May 2005 C sells 8 acres of the land and realizes a gain of $110,000. C does not sell the dwelling unit before the due date for filing C's 2005 return, therefore C is not eligible to exclude the $110,000 of gain. In March 2007 C sells the house and remaining 2 acres realizing a gain of $180,000 from the sale of the house. C may exclude the $180,000 of gain. Because the sale of the 8 acres occurred within 2 years from the date of the sale of the dwelling unit, the sale of the 8 acres is treated as a sale of the taxpayer's principal residence under paragraph (b)(3) of this section. C may file an amended return for 2005 to claim an exclusion for $70,000 ($250,000–$180,000 gain previously excluded) of the $110,000 gain from the sale of the 8 acres.

[lbbwest]

Clearer Heads

After hearing from clearer heads obviously my post was incorrect. However, if the house doesn't sell during the time of the extension, if you claim the gain you still may have underpayment issues, as tax is due as of April 17th.

[cpeters]

Sale Of Vacant Land

The main home is expected to sell shortly and before October 15. I like the idea of filing an extension to buy some time, however another question. Would the tax on the gain on the vacant land sale be required with the extension request?

Then,if the main home is sold within the guidelines is an amended return required to obtain the refund for the tax paid on the vacant land sale, assuming none is due? How is this supposed to be handled?

Sure gets confusing!!! And I want to do it correctly!

[Bill Tubbs]

Extension

The main home is expected to sell shortly and before October 15. I like the idea of filing an extension to buy some time, however another question. Would the tax on the gain on the vacant land sale be required with the extension request?

How sure is the client the house will sell? When I mention the extension to the client, tell them you can calculate how much would be due with the extension either way, and let them pick. The worst that can happen is that they assume the house will sell, it doesn't, and then if they owe money after April 17th the IRS will add on a bit of interest... no big deal.

Then,if the main home is sold within the guidelines is an amended return required to obtain the refund for the tax paid on the vacant land sale, assuming none is due? How is this supposed to be handled?

Not sure what you're asking here... if you filed an extension and wait until the house sells, there is no amendment. If you file an actual return now without claiming the Sec 121 for the lot and then later the house does sell, you can easily file an amendment to claim Sec 121 for the lot and get the tax difference back.

Bill

[cpeters]

Sale Of Vacant Land

I'm definitely confused. The vacant land was sold 2/28/2006. Plans are to sell the main home this year.......in fact, it's already advertised......and prospects are good that it will materialize as planned.

Publication 523 states:"The sale of the vacant land is not a sale of the main home unless:
The sale of the 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". I interpret this to mean if the sale of the home is completed before 2/28/2008, then the vacant land falls within this time limit and is eligible for exclusion on the 2006 tax return. This is a MFJ return.

If this is true, how is the sale of the vacant land reported on the 2006 tax return?
Can it be entered as "Vacant Land Adjoining Main Home Section 121 Exclusion" with the proper dates but without a sales price nor a cost basis? Or with a sales price and cost basis the same, resulting in zero gain or loss but giving the IRS "match-up"notification of the transaction.

Incidentially, the client received a 1099-S from the closing attorney covering the land sale.

Would anything I have said make sense or work? Or has this tax season caused me to "lose it"?

[Gene V]

I would show it just like Example 3 in my prious post.--What the example is telling you, is to report the sale of the land on your 2006 return as capital gain on Sch. D., then when you sell your house in 2007 or early 2008, you tie the sale of the house to the land. Which means- you amend your 2006 tax return.

[GIMoe]

Sale of Lot

I'm definitely confused. The vacant land was sold 2/28/2006. Plans are to sell the main home this year.......in fact, it's already advertised......and prospects are good that it will materialize as planned.

You can not treat sale of land on the assumption that the house will sell. To date it has not sold and that is how it should be reported.

Publication 523 states:"The sale of the vacant land is not a sale of the main home unless:

The sale of the 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".

I interpret this to mean if the sale of the home is completed before 2/28/2008, then the vacant land falls within this time limit and is eligible for exclusion on the 2006 tax return. This is a MFJ return.

You have a target date -- 2/28/2008

If this is true, how is the sale of the vacant land reported on the 2006 tax return?
Can it be entered as "Vacant Land Adjoining Main Home Section 121 Exclusion" with the proper dates but without a sales price nor a cost basis? Or with a sales price and cost basis the same, resulting in zero gain or loss but giving the IRS "match-up"notification of the transaction.

Incidentially, the client received a 1099-S from the closing attorney covering the land sale.

Would anything I have said make sense or work? Or has this tax season caused me to "lose it"?

You report it on Scd D as a Capital Gain. If the home sells by your target date, then you go back and amend 2006 to claim the exclusion.

[cpeters]

Sale Of Vacant Land

I want to thank everyone of you that responded to my question and also tell you that I have handled the situation as you advised. The extension for the return is being filed today and the client is paying the tax on the sale of the vacant land. Hopefully the main home will sell soon and they feel very positive about that.

Again, just wanted to let you know you've been a great help and thanks so much!