Home and land sale.

[WATax]

Hi folks,

I'm new here. I'll be working for intuit as a tax associate this tax season. I plan to purchase ProConnect after my start date and take on some basic 1040 clients of my own. Of course family members are my first clients:) 

My daughter and her husband purchased a home on 15 acres of land about four years ago. In 2024 they subdivided and sold10 acres. Later in 2024 they sold the house and the remaining five acres.

How do they determine the basis of the 10 acres of land sold? Not sure if the original appraisal breaks out the home and land value. I've read that in some cases one can use the property tax evaluation.

Also, the two sales were to two different parties, would the $500,000 gain exclusion apply to both sales?

I haven't found examples like this situation so far in my research.

Thanks!

[BobKamman]

If they used all 15 acres as part of their principal residence, you can exclude $500K gain from both transactions combined. I would report it as a single sale and attach an explanation that the proceeds came from two separate Forms 1099-S on two separate dates.

You haven't put much time into research if you haven't even found the Regulations for Section 121.  

[Terry53029]

@BobKamman I thought you were limited to one sale every two years. from 26 US code:

(3)Application to only 1 sale or exchange every 2 years

Subsection (a) shall not apply to any sale or exchange by the taxpayer if, during the 2-year period ending on the date of such sale or exchange, there was any other sale or exchange by the taxpayer to which subsection (a) applied.

Link: https://www.law.cornell.edu/uscode/text/26/121.

Bob you may be correct, but my understanding was only one exclusion every two years, so how can client take two exclusions in one year ?

[qbteachmt]

"about four years ago."

The Ownership provision and the Use provision are separately evaluated.

Gross income shall not include gain from the sale or exchange of property if, during the 5-year period ending on the date of the sale or exchange, such property has been owned and used by the taxpayer as the taxpayer’s principal residence for periods aggregating 2 years or more.

"How do they determine the basis of the 10 acres of land sold?"

10/15. They sold 2/3 of the land.

"Not sure if the original appraisal breaks out the home and land value."

Did you look at the tax records? If nothing else, it should show the different property types (land, improvements) and that gives you the ratio of what they paid, for purposes of acreage vs residence on its parcel.

"I've read that in some cases one can use the property tax evaluation."

If it's anything like MT, the valuation isn't what they paid. You don't need what is was "worth" for tax purposes. Basis + improvements including filing for variances and/or survey, deed/title issues.

"Also, the two sales were to two different parties, would the $500,000 gain exclusion apply to both sales?"

(3) Vacant land—(i) In general. The sale or exchange of vacant land is not a sale or exchange of the taxpayer's principal residence unless—

(A) The vacant land is adjacent to land containing the dwelling unit of the taxpayer's principal residence;

(B) The taxpayer owned and used the vacant land as part of the taxpayer's principal residence;

(C) The taxpayer sells or exchanges the dwelling unit in a sale or exchange that meets the requirements of section 121 within 2 years before or 2 years after the date of the sale or exchange of the vacant land; and...

You're going to need to learn how to use IRS and web resources. Try this link:

https://www.law.cornell.edu/cfr/text/26/1.121-1

Intuit isn't giving you access to ProConnect for free? Sheesh.

[IRonMaN]

"In 2024 they subdivided"

That doesn't sound like the sale of a personal residence, but instead sounds more like the sale of investment property.  But as Bob has pointed out several times, I am one of those that tend to the work for the IRS agents so I will let him come back with the precise details on why the client has it made in the shade by considering the two sales as one.

[BobKamman]

@Terry53029  Yes, you are limited to selling one primary residence every two years, even if two homes are sold in one transaction.  But that is not the question here.  @qbteachmt found the right Regulation, which says you cannot sell acreage along with a home unless it was used as part of the principal residence.  Those of us outside Minnesota who are not IRS auditor wannabes will take the taxpayers here at their word, that the home was on 15 acres, and keep reading that same Regulation to find examples of how this works:

Example 4.

In 1998 Taxpayer D buys a house and 1 acre that he uses as his principal residence. In 1999 D buys 29 acres adjacent to his house and uses the vacant land as part of his principal residence. In 2003 D sells the house and 1 acre and the 29 acres in 2 separate transactions. D sells the house and 1 acre at a loss of $25,000. D realizes $270,000 of gain from the sale of the 29 acres. D may exclude the $245,000 gain from the 2 sales.

In fact, they could have sold some of the acreage in one year and the house itself in the following year, and still qualified:

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.

https://www.law.cornell.edu/cfr/text/26/1.121-1

It probably helps that I was around 20 years ago when a friendlier IRS was interpreting new Code sections from a friendly Congress.  So, I vaguely remember something was issued to address these situations, perhaps because some Member of Congress had a cousin whose situation matched the facts.  The lesson for newcomers to tax research is to proceed from the top down, not from some AI beta version.  Read the Code section.  Then read the Regulations.  Maybe you won't have to go any farther.

[George4Tacks]

@WATax Do you know that you do need an EFIN to e-file with ProConnect. If you don't have one now, get started right away to get it. You can print without the EFIN, but you can't e-file.

You can do practice returns on the product now. Use your current log in information and do a 2023 return. Check return and you can see all the forms and get used to it. If you PRINT or E-FILE, it will cost you to use a credit. If you don't do either of those two items, there is no cost. 

You do also need a PTIN, but that would be required even if you didn't e-file. 

[Terry53029]

@BobKamman Thanks Bob, Learned something new today. Have never had a client sell part of property before. Being that this person sold land 1st and home 2nd in same year he can combine both, and not have to amend the land sale if he did it in two different years. Thanks again.+

[WATax]

Thanks Bob!

Much appreciated!

I'm guilty as charged on the research:( I like your advice on "top down research" in your post later.

I've got a lot to learn for sure (I retired from governmental accounting) it's good to get chided from and old salt😊 

[WATax]

They did use the 15 acres with the home. Things like tapping the maple trees, hunting and a great playground for the kids.

[WATax]

Thanks qbteachmt!

Our tax valuations for property is typically well below market here in MN as well. The example I referred to said to get the ratio of the land to house as you indicated.

They do meet the citation you posted:

(3) Vacant land—(i) In general. The sale or exchange of vacant land is not a sale or exchange of the taxpayer's principal residence unless—

(A) The vacant land is adjacent to land containing the dwelling unit of the taxpayer's principal residence;

(B) The taxpayer owned and used the vacant land as part of the taxpayer's principal residence;

(C) The taxpayer sells or exchanges the dwelling unit in a sale or exchange that meets the requirements of section 121 within 2 years before or 2 years after the date of the sale or exchange of the vacant land; and...

And thanks for the link for research help!

[WATax]

Intuit isn't giving you access to ProConnect for free? Sheesh.

I won't know the price of ProConnect until I've started working. I've heard it's a deep discount!

[WATax]

Those are great examples Bob, I like!

[WATax]

@George4Tacks 

Thanks for the tips!

I do have the PTIN and EFIN.

I'm using the trial version now. I'd like to practice with sample clients. Do you know if there are any available to input?

[George4Tacks]

@WATax There are no samples. Reproduce your own return.

[qbteachmt]

"They do meet the citation you posted"

What about the 5-year holding period?

[BobKamman]

There is no five-year holding period except for homes acquired with a Section 1031 exchange.  They owned the home two years, out of the last five years.  

[WATax]

@BobKamman 

Good to know.

Thanks!