Taxable sale on part of client's residence land?

[Sherill]

Oh boy - Client lives in her residence all of her life, located on 80 acres.She has assumed parent's mortgage. She now needs money and sells ten acres in '07.
Is this a taxable capital gain or would it fall under the selling of one's principal residence, only restriction being that it be under $250,000 limit to be nontaxable.
I've read TaxBook 6-19 and Pub 544. I find no explanation for selling partial pieces of principal residence.
Thanking you in advance for your input, again and ...again..... : O )

[Roland Slugg]

Gain if she keeps the house

Dear Sherill

Unless she sells the house within two years after selling those ten acres, the sale will be taxable and won't qualify for the §121 exclusion. The time period for a step transaction involving one's personal residence plus adjoining land is actually four years ... two before and two after. See IRS Pub 523, p.3.

Did she inherit the land and residence? You mentioned that she sold the property, but you also referred to her parents' loan.

[Sherill]

It is taxable correct?

She inherited/assumed/was gifted with love and affection - the mortgage in l988, and shall live out her days in her residence. No chance of selling the house.
Therefore, if I read you correctly, the 10 acres is taxable with included basis?

[Roland Slugg]

Therefore, if I read you correctly, the 10 acres is taxable with included basis?

Yes. Allocate the T/P's basis to the house, land and, if applicable, other buildings according to their respective FMVs as of the dates inherited or received via gift.

The basis allocated to the land does not have to be the same for each acre. If parts of the land are more valuable than others, due to road access, topography, zoning or other factors, you may consider advising the client to allocate the basis proportionately. This is permissible, as long as the basis for the uneven allocation is reasonable. If the client does this, good documentation would be advisable.