Tax on the sale of land can be an unexpected burden. Here’s everything you need to know in order to be prepared for taxation on your sale.
When selling your land, tax is an unhinged outcome. An outcome not many expect, but it’s there.
In the case of a tax on sale of land, it is entirely possible to reduce it and in some cases eliminate it completely.
In this article, we will cover how to minimize the tax on the land sale.
How Is Capital Gain Taxed?
When it comes to capital gains, which is that of selling a land property – there are two specific tax schemes that apply.
These are the gains on an asset that you have had for a year or less. They are taxed at the same rates as your regular income would be taxed. So the same rate you pay for your interest, freelancing, and work income applied to share.
So your tax rate will vary between 10% to 37%, depending on your specific circumstances.
These are the gains that you have held for over a year. They are taxed at better rates, and the current rates range from 0% to 20%, depending on your personal income.
For example, gains on the sale of collectible items are taxed at 28%
However, there is an exclusion in terms of capital gains. For instance, if you sell your primary residence – you can exclude up to $250000 if single, and double that if you are filing a joint return as a married couple (Section 121 exclusion).
In any case, a test will be performed which should prove that you own the land, and it’s been used for 2 out of 5 years after the date of sale (purchase).
You can meet the requirements for these tests at two different periods, but they should both be within the first 5 years of preceding the original date of sale.
Now let’s move on to reducing your tax on the sale of land.
Taxable Income Reduction
If you paid attention, you would notice that your short-term gain tax rate is stringent upon your personal income. So if you can perform personal tax-saving strategies, they will transfer on to the capital gains.
Therefore, maximizing your credits and sections will help you do this. For example, donations and medical examinations are a great way to do that.
If you have contributions to a 401k or IRA, you should envelop the full amount for the biggest deduction. If you use municipal bonds, the interest is exempt from tax and is excluded from taxable income.
In any case, for the best methods of reducing your tax, you should go straight to the source of the IRS. Credits and Deductions page is a good place to start.
Exchange, Not Sell
Sometimes selling a property is not the best option. What you can do is perform a 1031 exchange, a transaction that allows an owner to defer gains tax by selling a property and replacing it with another within a specified period.
However, you have to work with a third-party intermediary (attorney) who is neutral to the outcome. You have to find a property similar to the one you are selling within 45 days. And to avoid taxes, you have to use all of the proceeds from the sale to purchase the new property.
Other rules apply, so research the legal process online. You can always navigate to the IRS for the updated information.
Rental Use Side-Effects
If you are tight on schedule, and you can’t sell your land – you might be thinking of renting it out. However, that might protrude as a loss when you try to reduce your income during tax season. And this loss is directly related to depreciation.
Also, because you are renting, it is no longer a primary residence for you. So you cannot perform the primary residence reduction. If you have lived on the land for 2 years, you can still rent it for 3, as long as you meet the other exclusion requirements.
If you rented it out, you have to captivate any depreciation. This can be taxed in a variety of ways, but it will vary on the ordinary or capital gain. So if you’re unsure, it’s best to communicate with a tax attorney.
By not renting out your land, you will save money when it comes to selling it, but that doesn’t mean you shouldn’t do it. If done correctly, you can avoid the complexity of recaptured depreciation at the cost of loss on rental provisioning.
Finally, if you’re strung for cash and you really need to sell the land, your next best bet is the loss sale. If you can sell the land for less than what you paid for it (including depreciation), you will not have to pay ANY capital gains tax.
Even though this is the last resort option, it might be the first resort for others. If you have no use for the property, why keep it?
Tax on Sale of Land
Now that you uncovered the methods for reducing the tax on sale of land, you are well on your way to saving and making money at the same time.
No matter what kind of property you are selling, nowadays, you can do it safely online in a matter of hours. There are many eager buyers looking for vacant land, and more often than not they have the expertise necessary to help you reduce your capital gains taxes.
If you would like to sell your land quickly, send us some information and we will connect you to 12 buyers.