Taxes On Sale Of Vacant Land

Q: I bought some investment vacant land 10 months ago, and I am now interested in selling the property.

First question, are the capital gains treated just like a stock capital gain? Do I need to hold the property for a year and a day before the long-term gain kicks in?
I don’t even know if there are short and long term gains associated with vacant land.

Secondly, can I take the profits and invest directly into a piece of land that I will build my new house on? I would like to sell my current house and build a new one on a new parcel. I read a little about the 1031 exchanges, but I wasn’t sure if I could use that process since the new property will eventually have a house on it. Any advice?

A: My understanding is that if you sell real estate that you’ve owned for less than a year, you pay income tax on the money not capital gains tax. Your tax liability would be a maximum of 35 percent. If possible, I’d make sure the closing is at least 12 months to the day after you purchased the property.

Once you pay your taxes, you can take the cash and reinvest it. But a 1031 Exchange would not be possible if you plan to live on the new property. It is simply a means for exchanging one piece of investment property for another and deferring any capital gains taxes owed.

I wouldn’t plan on using a 1031 unless you’re building a rental house on the new parcel of land, in which case then it should be okay.

Please talk to a real estate attorney and an accountant who is knowledgeable about taxes owed on the sale of investment property.


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