Is selling land a taxable event?
Short answer: it can be. Selling land for more than your tax basis in it generally produces a capital gain that is reported on your federal income tax return. Selling for less may produce a capital loss. Your own result depends on facts a CPA needs to see.
The IRS describes the basics in Topic no. 409, Capital Gains and Losses. This guide follows that topic and IRS Publication 551 (Basis of Assets). It does not give rates or dollar thresholds, which change by year and by filer. See the IRS pages for the current tax year, and talk to a CPA before you set a price or sign a contract.
What is my basis in land I bought?
Short answer: basis is generally what the land cost you, adjusted over time.
IRS Publication 551 says basis is the amount of your investment in property for tax purposes and that the basis of property you buy is usually its cost. Your original basis is adjusted by certain events. The publication says that increases include costs of improvements with a useful life of more than one year. It also says to keep accurate records of everything that affects basis, because you use basis to figure gain or loss on a sale.
For land, that means looking for the original closing statement, records of purchase-related costs, and receipts for improvements such as a driveway, fencing or utilities. Whether a particular cost counts is a CPA question.
Does it matter how long I owned the land?
Short answer: yes. The holding period decides whether a gain is short-term or long-term.
IRS Topic 409 says that if you hold an asset for more than one year before you dispose of it, your gain or loss is generally long-term. If you hold it one year or less, it is short-term. The holding period starts the day after you acquired the asset and runs through the day you dispose of it. The IRS also says net short-term capital gains are taxed as ordinary income at graduated rates. Long-term gains are taxed under separate rules, which the IRS page lays out for each tax year.
Dates matter. Keep the deed, closing statement or estate documents that show when you acquired the land.
How is basis set for land I inherited?
Short answer: inherited land generally does not use what the person who died paid for it. The rules are different, and they are worth checking before you sell.
Publication 551 says that, generally, the basis of property inherited from a decedent is one of the following: the fair market value of the property at the date of the individual's death, or its fair market value on the alternate valuation date if the estate's personal representative chose to use it. It also says that when an estate is required to file a federal estate tax return (Form 706), beneficiaries generally receive a Schedule A (Form 8971) from the executor reporting the estate tax value, and that certain beneficiaries must use that value as their initial basis. The publication points to IRC section 1014 and its regulations, and describes exceptions, including for appreciated property that you or your spouse gave to the decedent within one year before death.
Property that came through a trust has its own rules. Publication 551 says property distributed from a non-grantor trust generally carries over the trust's basis. Whether any of this applies to you depends on how the land was held. See selling inherited land and selling land held in a trust, and ask a CPA.
How do I report the sale, and what about installment sales?
Short answer: you generally report the sale on Form 8949 and summarize it on Schedule D. If you are paid over more than one tax year, the installment rules may apply.
IRS Topic 409 says you calculate capital gain or loss on Form 8949 and summarize capital gains and deductible losses on Schedule D (Form 1040).
IRS Topic no. 705 defines an installment sale as a sale of property where you will receive at least one payment after the tax year in which the sale occurs. Under the installment method, you include in income each year only the part of the gain you receive, and you use Form 6252 to report it. Interest on the installment obligation is generally reported as ordinary income. There are situations where the method does not apply, and you can elect out. Seller financing and deferred payments change your tax picture, so raise them with your CPA before you agree to terms, not after.
Does Texas tax the gain? What about other states?
Short answer: Texas does not have a personal income tax, but other states may tax your gain.
The Texas Comptroller of Public Accounts states that Texas does not have a personal income tax, and the Office of the Governor describes the state as having no corporate or personal income tax. That does not remove federal tax. Property taxes and any agricultural-exemption consequences are separate matters (see agricultural exemption and selling land).
If your land is outside Texas, or you live in another state, your state may tax capital gains. Rules vary by state, so look up the state revenue department for the state where the land sits and the state where you live. Also ask your CPA about the home-sale exclusion. IRS Topic no. 701 describes it as available for the sale of your main home, if you meet ownership and use tests. Vacant land is not described there as eligible by default. Whether any part of your sale qualifies is a CPA question.
Outside Texas, verify rather than transplant the rule
Short answer: federal rules apply nationally. State rules do not.
The federal items in this guide come from the IRS and apply nationwide, but check the current tax year. State income tax, state reporting requirements and withholding on sales by non-residents vary. If the land is in a state where you do not live, look up:
- The state department of revenue for how it taxes gains on land located there.
- Whether the state requires withholding or a filing when a non-resident sells real property.
- Your home state's rules, if you live in a state that taxes income.
Do not assume the Texas answer applies in another state.
What to ask a CPA, and what a buyer (including StraightAcre) will want to see
Questions for a CPA:
- What is my basis, and which of my records support it?
- Is my holding period long-term or short-term?
- If I inherited the land, what basis applies, and do I have the estate documents that show it?
- Does the installment method fit this deal, and how would it be reported?
- Will any state tax my gain, and does the buyer or closing company withhold anything?
- What should I set aside, and when would payments be due?
What a buyer will want to see: the deed or estate documents, the legal description and parcel number, tax statements, and any recorded easements or liens. The buyer does not need your tax records. Keep them for your CPA.
StraightAcre buys directly or assigns its purchase contract to a vetted buyer, and tells you in writing which before you sign. Closings run through a licensed title or escrow company in the property's state. StraightAcre is not a licensed brokerage and gives no legal or tax advice. This guide is general education, not tax or legal advice.
Sources and further reading
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