How to Estimate Capital Gains Taxes Owed on Sold Land

Profits on the sale of land can be taxed at many different rates.

Profits on the sale of land can be taxed at many different rates.

The Internal Revenue Service assesses capital gains tax on almost anything you sell at a profit. Land, whether developed as inhabitable space or left as a barren parcel, falls under the heading of a capital asset for tax purposes. As with the sale of stocks or other financial investments, land can be taxed at either short-term or long-term rates, with long-term rates being more favorable. As of 2013, your income plays a role in determining your tax rate, with higher-income taxpayers more susceptible to a higher tax rate.

Determine the holding period for your land. The time between when you bought the land and when you sold it is the biggest determining factor in calculating how much you'll owe the tax man. If you sold the land more than one year after you bought it, you have a long-term gain. If your sale was one year or less after you acquired the property, it's a short-term gain.

Select a tax-filing status. Most taxpayers only have one or two choices when it comes to filing status. For example, if you're single, never married, with no kids, your filing status is single, with no other options available. If you're married, you can only choose between married filing jointly and married filing separately.

Record your taxable income and determine your ordinary income tax rate based on that. The amount of money you make plays a direct role in how your land profits are taxed, whether your gain is short-term or long-term.

Calculate your gain by subtracting your cost from your sales proceeds. You may have to adjust your cost, also known as your "basis," upwards or downwards for any number of reasons. For example, legal fees or zoning costs might increase your costs, thereby lowering your taxable gain. Depreciation, insurance reimbursements, or casualty or theft losses may lower your basis. IRS adjustments to basis are outlined in Publication 551.

Multiply your gain by the appropriate tax rate. If you had short-term gains from your sale of land, your gains are taxed at your ordinary income rate. For example, if you're in the 15 percent bracket, your short-term gains are taxed at 15 percent. If you had long-term gains instead, determine your long-term gains rate, according to your filing status and tax bracket, which you can find in IRS Publication 550.

Tips

  • When making your estimate, include your depreciation taxes. If you took a deduction for any depreciation on your land, you'll be taxed on that deduction when you sell the property, a process known as "recapture." The tax rate on recaptured depreciation is 25 percent.
  • Add in the Medicare surcharge tax, if applicable. As of 2013, the IRS slaps an additional 3.9 percent tax on capital gains for taxpayers with over $200,000 in adjusted gross income, or $250,000 for joint filers.
  • For most investors, the long-term capital gains rate falls between 0 percent and 15 percent. If your taxable income is above $200,000, or $250,000 for a married couple filing jointly, your top rate rises to 20 percent.

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