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The IRS gives you a big break on vacant land, even if you donâ€™t sell it at the
TAX SHELTER WHEN YOU SELL YOUR HOME
same time you sell your home. It says that the exclusion applies to vacant land that you have owned and used as part of your principal residence if you make a qualifying sale of your residence within two years before or two years after the sale of the land. To get this break, the vacant land must be adjacent to land containing your residence, and the sale of the vacant land must otherwise satisfy the two-year ownership and use rule and the once-in-two-years rule.
Your Lot. The lot on which your house is located would be considered part of your residence, not vacant land.
The IRS has illustrated the application of the vacant land rules.
In 1991, Taxpayer C buys property consisting of a house and 10 acres that she uses as her principal residence. In May 2005, C sells eight acres of the land and realizes a gain of $110,000. C does not sell the dwelling unit before the due date for filing Câ€™s 2005 return, so she is not eligible to exclude the $110,000 of gain. In March 2007, C sells the house and remaining two acres, realizing a gain of $180,000 from the sale of the house. C may exclude the $180,000 of gain. Because the sale of the eight acres occurred within two years from the date of the sale of the dwelling unit, the sale of the eight acres is included as a sale of the taxpayerâ€™s principal residence. To get a partial refund of the tax she paid on the sale of the land, C may file an amended return for 2005 to claim an exclusion for $70,000 ($250,000 exclusion - $180,000 gain previously excluded) of the $110,000 gain from the sale of the eight acres.
4.10 Snowbirds: How to Deal with the Southern Home Trap
Are you one of the thousands of retirees who will migrate from your chilly northern roost and fly south or southwest in search of warm weather after the fall foliage season?
If so, you may be one of the so-called â€śSnowbirdsâ€ť who technically are residents of Florida, Arizona, or southern California but who return north to their old principal residences shortly after the spring crocuses peep through the
HOW TO SELL YOUR HOME WITH NO TAX ON GAIN
winter snow. For you, the Snowbirdâ€™s back-and-forth flight pattern can create a tax problem.
To illustrate, suppose you are one of the Snowbirds who owns homes both in the north and in Florida. You claim residency in Florida because Floridaâ€” unlike New York, for exampleâ€”imposes no income tax. Suppose also, as often is the case, your northern home is considerably more valuable and more highly appreciated than your Florida home.
This situation presents a potentially serious tax trap for you. If the northern home is sold, will gain on its sale qualify for the exclusion? Ironically, the danger is that the very steps you may have taken to establish Florida as your residence for state income tax purposes may knock out principal residence status for your northern home for federal income tax purposes. The loss of qualification of the northern home for the exclusion can cost you big tax dollars.
You and your spouse own a northern home in a desirable suburb that you bought for $150,000 years ago. It has tripled in value to $450,000, so that you would have a gain of $300,000 on its sale. Four years ago you bought a condominium in a golf course community in Florida for $100,000. You live there seven months a year and have established Florida as your legal residence. You have returned north for the summers but now plan to sell the northern house.
The Trap. If your Florida condominium became your principal residence when you bought it four years ago so that your northern home hasnâ€™t been used as your principal residence for at least two out of the last five years, the sale of your northern home will be taxable. The federal tax hit would be $45,000 (15% x $300,000, the gain on the sale). The tax could have been completely avoided if the northern home had remained your principal residence.
If you plan to sell your northern home and retire permanently in Florida or another Sunbelt state where you will have your principal residence, tax planning is important if your northern home is substantially appreciated. You should sell the northern principal residence before you cease to meet the requirement for having owned and used your northern home as your principal residence for two out of the five years preceding the date of sale.
TAX SHELTER WHEN YOU SELL YOUR HOME
4.11 Gain in Excess of the Exclusion
Suppose your gain will exceed the $250,000 (or $500,000) exclusion. Can you shelter the excess?
In some situations, yes. Where you have gain substantially in excess of the exclusion, you may want to look into specialized tax-planning ideas for dealing with gain in excess of the exclusion. (See Sections 5.4 through 5.7.) Some of these ideas are relatively complex, but occasionally may be worth pursuing because they can keep the tax collector at bay. In addition, you should consider the following: