Land sales are usually not good sources of tax deductions. Since the land isn't a home, you can't write off your moving costs and you can't claim the capital gains exclusion to reduce your capital gains liability. However, a few deductions are available -- and more than a few in some cases.
Land Sale Deductions
When you sell your land, review your settlement statement carefully. If you are assessed any property taxes as a part of the prorations, you'll be able to deduct them with your other property tax deductions. None of the other expenses on your closing statement will be deductible from your income tax.
Land Sale Adjustments
When you sell your land for a profit, you will be subject to capital gains tax on that profit. However, the Internal Revenue Service's definition of profit is relatively generous. You don't calculate your profit by subtracting your purchase price from your selling price. You can increase your purchase price -- or, more generally, your cost basis -- by adding any closing costs from when you bought the land and any improvement costs that you incurred during your ownership. You also reduce your selling price by subtracting your commissions and closing costs at the sale. These deductions can significantly reduce your capital gains tax liability.
Investment land is treated more generously in terms of deductions for capital gains. If you had a loan on your investment land and have loan costs that you have been amortizing, you can include any unamortized portion of those costs as a lump sum if you have a loss. For instance, if you spent $15,000 to get a 10-year loan, and you've had the loan for five years, you can claim the remaining $7,500 of that loan fee as a reduction to your capital gain. In addition, if you sell your investment land for a loss, you can use that loss to offset other capital gains that you earn in that year.
Land With Home
When your land is part of your home, you get to include it in your home's sale. This would happen, for instance, if you own a vacant parcel next to your house as a buffer from your neighbor and you sell the vacant parcel at the same time as you sell your house. By including the land with your house, it becomes eligible for the same $250,000 -- or $500,000 if you're married and filing jointly -- capital gains exclusion that your house gets if you've lived in it for two of the past five years and claimed it as a primary residence.
- Dale Realty, Incl: Real Estate Tax Tips
- IRS: Publication 544 -- Sales and Other Dispositions of Assets
- IRS: Publication 551 -- Basis of Assets
- Mark Minassian, CPA: Tax Deductible Closing Costs on an Investment Property
- IRS: Ten Important Facts About Capital Gains and Losses
- IRS: Publication 523 -- Selling Your Home
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