Owning land is fun. Selling land you no longer need for a nice profit is also fun. Dealing with taxes on the income you receive after the land selling process? Not so fun.
Almost everything we do in life inevitably need with taxes. So before you actually do anything with that plot of land you are sitting on, it pays to do some research about taxes, to make sure it’s worth it for you to sell land, or if you should keep and do something else with it instead. A surprising tax bill at the end of the year can sure make those gains taste a lot less sweet. So read on below to equip yourself for the taxman before you list your land for sale.
The Joy of Capital Gains
Capital gains tax follows us around everywhere. Whether you are investing in the stock market, testing out the latest cryptocurrency trends, selling your personal home, or in our case, selling a plot of land, you will likely be subject to capital gains tax.
Any time you sell some type of asset, such as land, that has increased in value since you purchased it, you are benefitting from capital gains. The boost in value is a “gain” on your original capital. Makes sense, no?So capital gains are great because it means you are increasing wealth through solid investments. What’s not great (depending on how you look at it) is that the government wants a share of those gains. That’s the capital gains tax.
Capital gains tax falls into two categories; short-term and long-term. Long-term gains are assessed on any assets held for more than one year. Short-term gains are any gains from assets sold within one year of purchase. So if you’ve held your land for more than a year and are ready to sell it, you’ll pay taxes on the profit (gains) based on your current income level. Tax rates are 0%, 15%, or 20% depending on your annual income level.
If you are filing as a single individual, you’ll only pay the 20% long-term tax if your annual income is $445,851 or higher. If you make less than $40,000 in a year as a single filer, you’ll pay $0. Short-term capital gains tax is the same as your income tax level. These are generally higher than long-term gains. Check your current income tax bracket to determine short-term taxes.
Other Taxes and Exemptions
If your income is a certain level, you may need to pay the Net Income Investment Tax (NIIT). This applies to those earning more than $200,000 per year filing individually, or more than $250,000 filing jointly will be subject to this tax on land sales. The tax rate is currently 3.8%.
However, if the land was used as your primary residence, you may be able to save a lot of money on the sale. By taking advantage of the Section 121 Personal Residence Exclusion, up to $250,000 for individuals and $500,000 for married couples filing jointly can be exempt from your gains tax. To use this tax-saving tool, the land will need to have been your primary residence for at least 24 months out of the last 60 months.
1031 Exchange
One of the benefits of purchasing land and selling for a profit is the opportunity to defer capital gains tax. This also applies to any type of real estate, be it a home, a rental property, an apartment complex, and so forth. By using a Section 1031 Exchange, if you sell your land and use the proceeds to buy real estate of equal or greater value, you can defer your taxes to the next property.
So instead of paying the taxes now, you could pay after you sell the next property, so you don’t lose any money out of pocket today. And of course, every time you sell, you can continue to use the program and defer taxes. So long as you always buy and never cash out the proceeds, you don’t have to worry about the taxes. The only risk by deferring taxes is that tax rates could rise in the future, so when you eventually cash out, you might have to pay a higher rate.
After the Sale
Let’s say you sold the land and decided not to use a 1031 Exchange. You’ll have to pay any relevant taxes. When filling out your tax return, you’ll list the sale price of the land on your tax forms, and you’ll see how much you’ll need to pay as a result.
By working with a qualified CPA, there may be other ways you can reduce your tax liability since the net gains and losses of your capital gains add up to your final tax bill. If there are any losses you can take, that could be less tax you have to pay.
Setting Up a Charitable Trust
Another way to avoid taxes is by setting up a charitable trust. By placing land assets into a tax-exempt trust, they can then be sold tax-free. Of course, the proceeds belong to the trust and won’t go into your pocket. But with the right strategy, the proceeds can be invested for the long-term benefit of both you and your beneficiaries.
Is Buying and Selling Land Worth it?
If your income is really high, then you could be on the hook for as much as 40% tax on the gains from selling your land on a short-term basis. Most landowners have a lower income and can expect to pay between 15% and 20% since land is usually held long-term before being sold. Even with taxes, selling your land that was held for a long time can provide you with some serious cash flow. Ready to capitalize on those gains and put some cash into your pocket? Learn more about selling land the fast and easy way here.
Finding the Best Place to Park Money
Buying land isn’t the most popular investment strategy. It works best when you can hold land for a really long time in an area that will eventually be in high demand. Even so, there are probably better places to park your money for faster gains. Selling land you have and putting the proceeds into assets that appreciate much quicker may be a wise move. Looking to learn more about the best investment strategies?