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Splitting sale of property between land and building?

asparrow08
Level 1

Taxpayer purchased land in early 2019, and built a house on it in 2020.  He intended on moving into the house, but to sell instead late in 2020 before moving in.  Land was held for more than a year, so I believe that portion of the sale should be considered a long-term capital gain with the remainder being short-term.  Someone can correct me if I'm wrong, but I haven't found anything that says you CAN'T do this. 

My problem is splitting the sale price between land/building.  I looked at the tax assessment from the county and considered using that to split the cost between land and building, but it would result in a large gain on the land a loss on the building.  Any thoughts on this?

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13 Replies 13
Glossy847
Level 3

Could it be possible that the assessment included a partial assessment on the building because the assessment was done before the house was finished?

asparrow08
Level 1

Maybe?  There's an updated assessment as of 1/1/2021, and the land/building split is pretty similar.  I'm not sure how else I could split the transaction.  

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BobKamman
Level 14

but it would result in a large gain on the land a loss on the building. 

Whose side are you on here, anyway?

Seems perfectly reasonable to me that land would appreciate from 2019 prices, when everyone started wanting to socially distance.  And construction costs soared when housing became scarce and workers were collecting unemployment.  Maybe the guy wasn't much of an architect and built the place without a kitchen because he doesn't like to cook.  

asparrow08
Level 1

I'm on the side of doing what is correct and not raising red flags.

So do you think that this approach would be reasonable and correct to split the sale short-term and long-term?  In this situation, the land was purchased for about $40k and the tax assessment on the land is about $150k.

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BobKamman
Level 14

Only narcissists think that IRS is going to take a look at every return that happens to report a minor real estate deal.  The problem here is whether any loss can be claimed on any part of the deal because it was an asset held for personal use.  That gets back to the question of holding period.  There's probably some case law on that, but the week before April 15 is not the time to be looking for it.  

asparrow08
Level 1

Ha, definitely not a narcissist, just don't want to do anything blatantly incorrect.

Thanks for the input - if he never lived on the property, you could make the argument it wasn't a personal use asset and was an investment instead?

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sjrcpa
Level 15

I think that would be a weak argument. You said he was building his personal residence. Probably indicated personal residence on loan docs.

i.e. Intent did not equal investment.


ex-AllStar
BobKamman
Level 14

The question is at what point the personal asset turned into an investment.  Or was that his intent all along. "I can make a lot of money on fliipping this dirt if I put up some sticks with a roof, but if that doesn't work out I can always live in it until I find a buyer."

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asparrow08
Level 1

Probably about half-way through the build, he realized it made more sense to sell it.  Never lived in it a day, so was never a personal residence.  He closed on the sale days after the build was complete.

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qbteachmt
Level 15

"I looked at the tax assessment from the county"

Take the assessment from the purchase timeframe, not current. Take the purchase of the land compared to the assessed value as the FMV ration for the land and use that going forward to break the land out from the total sale for current values.

That's what I do in a resort area near me, because the lots increase more than the buildings are even worth, quite often.

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BobKamman
Level 14

There are 3,141 counties, parishes or equivalents in this country. That might work in some of them.

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George4Tacks
Level 15

Historically county assessments are simply guesses. Getting a "real" appraisal for the value of land vs improvements is what would be best. I would be inclined to ignore the county assessment. The house is being sold with the land as a whole unit. One sale, no allocation. Since the house was completed less than a year ago you have short term gain or loss on the sale. 


ex-AllStar
BobKamman
Level 14

Getting an appraisal months later, when the taxpayer no longer owns the house, is not only impractical, it's meaningless.  And it's the sale of one property, but with two holding periods.  

Hypothetical:  Taxpayer owns Lot A for 20 years.  He buys adjoining Lot B and then sells them both in a single transaction six months later.  Since the combined property was created less than a year ago, it's all short-term?  I don't think so. 

There are some interesting rules that apply only to low-income housing properties that deal with breaking down the holding period based on when parts were refurbished or rebuilt.  Those don't apply here, but they show recognition of the question.  

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