Tax Burden On Selling Vacant Land For New Home

Added March 20, 2009 by Ilyce R. Glink

Print Articles

Summary: Selling vacant land and using the profits to buy a home may result in a 15 percent capital gains tax. Capital gains taxes can be deferred if he used the profits to buy another investment property. To avoid paying capital gains tax on vacant land, a home would have to be build and lived in for two years.

Q: My son bought vacant land about 5 years ago with the original intention of building his first home there someday.

He has now decided to buy an existing home and is planning to sell the property. He will realize a $400,000 profit on the sale of the land. What is the capital gains tax percent that he must pay or is there some way he can avoid the tax, since he will be using the profit to buy a home?

A: Congratulations to your son. What a fantastic investment. That profit will certainly give him a leg up on stabilizing his financial future.

In terms of this property, he will owe 15 percent in capital gains tax plus any state taxes owed.

The only way he can defer paying tax is to buy another investment property that costs at least as much as the current investment property sells for. He can then roll over the profits from the vacant land into the new property. He will be able to defer capital gains taxes by using a tax-free exchange.

But this is only for investment property. If he wanted to avoid paying tax on the property, he'd have to build the home and live there as the primary residence for at least 24 months.

There are certain rules he must follow in order to make the 1031 exchange work. If this is a possibility, I'd encourage him to talk to a real estate attorney who does plenty of tax-free exchanges.

Please talk to your accountant or tax preparer for more details.

See more articles on this topic by clicking on the "RELATED ARTICLES" above and to the right.

We have over 5000 articles on Real Estate Advice, Personal Finance Advice and Consumer Advice on our site. We encourage you to look at these articles. As always, if you have a comment on our articles, don't forget to post your comment below. We thank you for coming to ThinkGlink.com.

© Ilyce R. Glink. All rights reserved. This content may not be used, distributed, syndicated, compiled or excerpted in any medium or form without written authorization from Think Glink, Inc. For information on syndicating ThinkGlink.com please contact us.

Previous article Next article