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The sale of acreage in the Greater Philadelphia area is a taxable endeavor, no matter if the land sold is vacant or has an attached structure. If a seller profits from the sale of their property, and they’re not suffering from an underwater mortgage, your profits are typically taxed by the regional and federal government. If the government decides an individual home sale is taxable, the seller will be taxed by either ordinary income tax rates or at capital gains tax rates. If the seller happens to sell their land at a loss, they may be eligible for a tax exemption or deduction. When selling land in the Greater Philadelphia area, it’s vital to know about the differing taxes on land sales, how to file for them, and what it means to you.
According to the Internal Revenue Service (IRS), property sellers must report the sale of vacant land as either a capital gain or loss. By using Form 8949, “Sales and Other Dispositions of Capital Assets”, sellers can determine the total amount gained or lost from a property sale. This form is essential for filing for taxes on land sales.
Form 8949 is divided into two parts. The seller must be fill out the applicable section to properly assess their property’s tax gain or loss. Part I is meant for sellers who held their property for one year or less; Part II is used for property owned longer than one year. When filing this form, land sellers are asked to enter a description of their property, the date it was initially acquired, the date sold, and the final sales price. After that information is entered, Form 8949 asks sellers to enter all costs incurred during the acquisition of the property and the final sale of the vacant land. This general information will be used to tally the total gain of loss.
When filing for taxes on land sales, sellers will encounter Schedule D. This form summarizes all capital gains and losses throughout the entire tax year. To properly fill out this mandatory document, sellers must enter the total gains or loss calculated from Form 8949 along with any other individual totals. Both Schedule D and Form 8949 must be included with your tax return.
The IRS considers all real estate, even unimproved land, to be a capital asset. Consequently, if landowners keep their property more than one full year before selling, profits are taxed by capital gains tax rates. Capital gains tax on vacant land sale depends on the amount of time the seller owned a property. Unlike ordinary income tax rates, sellers of long-term land may pay the maximum rate of 15 percent. For properties owned for less than a year, the gain is classified as short-term and is taxed at ordinary income rates; depending on your individual tax bracket, you could see income rates as high as 35%. This capital gains tax is only levied if a seller experiences an aggregate capital gain on total sales of capital assets during the tax year.
Many landowners often wonder, “If I sell land do I pay tax?” The short answer: it depends on the profit gained, the forms filed, and if you can lessen total profit by using legal exemptions or deductions. Capital gains tax rates can be absurdly high, leaving many sellers to wonder how to avoid capital gains tax on land sale. Thankfully, there are a few legal tricks to manage the high taxes on land sales.
The most common tax exemption for landowners is dubbed “The Homestead Exemption”. This rule applies to sellers who built a structure on their property and lived within it for at least two of the five years leading up to a sale. If qualified, sellers receive a special capital gains tax exemption on their first $250,000 in profits and are exempt from further ordinary income tax. The major drawback from utilizing The Homestead Exemption is that sellers are not able to deduct any capital losses from the sale of their main home that’s positioned on the same property.
If you want to know how to avoid capital gains tax on land sale, you may also want to look into the numerous deductions available to qualified sellers. One of the most prominent deductions occurs when a seller decides to continue holding the property until it qualifies for long-term capital gains treatment – after a year of ownership. This method can save a considerable amount of money, especially if you fall into a higher income tax bracket.
Another option to deduct from taxes on land sale requires lowering your taxable income for the year. The lower a seller’s federal income tax bracket, the less they’re forced to pay on any capital gains accrued. For instance, sellers in a federal tax bracket of 15% or lower pay no taxes on long-term capital gains. (To qualify for this bracket, you must make less than $34,500 in taxable income per year, or $69,000 for married couples filing jointly.) There are many ways to lessen your taxable income, including contributing large amounts into a retirement plan, deferring salary bonuses until the next tax year, and making full use of other tax deduction methods.
A simple deduction method to avoid costly capital gains taxes on land sales includes receiving installment plans. Instead of being given all of your profits earned from a land sale in bulk, you can opt to receive gains from the buyer over several years. Although not traditionally taken, this payment method helps avoiding a lump sum payment that often raises your tax bracket and tax liability for the year of the land sale.
Another great way to ensure a tax deduction is by donating the land to charity. This option is meant for land sellers who don’t need the gains from a sale but still want to be rid of the property. By donating the land to qualified charitable organizations, sellers can receive major tax deductions while avoiding the capital gains tax altogether. If the land being sold is worth more than $5,000, it’s suggested to hire an appraiser. Determining its fair market value with the assistance of an appraiser will guarantee the amount of the deduction is correct.
At JJSS Enterprises, we focus on closing fast at your convenience. We know that having land in the Greater Philadelphia area that you can’t afford, or can’t maintain, can be a very stressful thing. No matter what condition your land is in, we’ll give you an obligation free cash offer!
If you have any questions about your land, or want to know more about the cash buying process, give us a call! We’re always happy to answer any questions. Call us today at (609) 460-3433, or visit our website.