How To Avoid Capital Gains Tax When Selling Vacant Land

When selling real estate property, a homeowner will have to shell out some of their profit to settle capital gains tax. The value depends on the selling price of the property, and usually, capital gains tax can amount to a burdensome price.

Homeowners and landowners alike can become concerned about settling inflated taxes, especially because they want to get a good return for their investments. The good news is that there are exceptions in place when selling vacant land in the form of income tax exclusions.

Income Tax Exemption When Selling a Home

State laws that govern real estate sale transactions allow a homeowner to exclude $250,000 or $500,000 of their profit from selling their home. If the homeowner is single, the cap of their tax exemption is at $250,000. On the other hand, married couples can enjoy an income tax exclusion of $500,000. 

For example, if a married homeowner sells a home worth $300,000, their gains are exempted from capital gains tax by virtue of their $500,000 income tax exclusion. Of course, this is provided that they meet the requirements. 

Not everyone can get the income tax exclusion. They have to meet the following elements: 

  • They must have lived in the home for 2 years in the last 5 years, i.e. considered it as their main home or primary residence. 
  • They must not have sold any other home in the last 2 years. 

This is a valuable perk for homeowners. But what if the subject of the sale is a vacant parcel of land? Will the income tax exception extend to gains from the sale of vacant land? This is a common concern for land sellers, as well as those who are looking to sell land that surrounds their homes. 

Income Tax Exclusion When Selling Land

A parcel of vacant land can be included in the income tax exclusion, provided that it meets certain requirements. Even if the vacant land is being sold separately from the home, it can receive exclusion coverage if it:

  • Is adjacent to the home 
  • Is sold within 2 years from the sale of the house 
  • Was used as part of the main home
  • Was owned and used within the last 2 years 

Provided that these elements are met, the sale of a house and its adjacent parcel of land will be considered as one and therefore is covered by the income tax exclusion. 

However, it’s worth noting that the exclusion will not apply to the vacant land if it is sold prior to the home. If the land is sold first, the seller would have to pay capital gains tax for that year. They can only get the exemption when the home is consequently sold within two years from the sale of the land. In this case, they can apply for a tax refund to retrieve what they paid from the prior sale. 

Talk to a Professional 

Selling a vacant parcel of land is a difficult feat, especially with all the technicalities and legalities that are involved. It’s important that you talk to a professional to help you navigate the waters and sell your land successfully.

Engaging a real estate attorney is also a good idea to help you understand and arrange matters that involve property taxes, legal contracts, titles, etc. A lawyer in your arsenal can ensure that your sale abides by legal regulations and mitigates any risks in the long run. 

On the contrary, you can consider selling to a direct buyer who can eliminate all the bells and whistles and make the process as streamlined and easy as possible. Reach out to us to learn more about how to sell your land to Slate Land Buyers

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