What Are Capital Gains Taxes on Land?

By Lora Keleher , last updated August 7, 2011

The IRS assesses capital gains taxes on land, when it is sold under certain circumstances. To understand capital gains taxes, it is first necessary to examine how the IRS views assets. Basically, the IRS considers almost every investment an individual owns an asset, including property and land. When you sell an asset, you receive more or less money than you originally paid for it. If you make money, the difference between what you originally paid, and what you sold the asset for, is the amount of your capital gain; conversely, if you lose money, the difference between what you initially paid, and what you sold the asset for, is considered a capital loss. The IRS taxes capital gains, while allowing people to take deductions for capital losses. Whether you pay a capital gains taxes on the sale of land depends on a number of factors including how long you have owned the land, if you resided on the property, and if the property was bought for investment purposes.

Personal Property

If you reside on the property, and meet the ownership qualifications set forth by the IRS, then you are excluded from paying capital gains taxes on the sale, up to a certain amount. Single filers can exclude the first $250,000, and joint filers can exclude the first $500,000. If you earn more on the sale than the maximum amount, you are required to pay capital gains taxes on the additional revenue.

Short Term or Long-Term

The IRS also looks at how long you have owned land before you sell it to determine whether income earned through the sale is taxed as a short-term capital gain, or a long-term capital gain. Revenue earned on land that has been in your possession for one year or less is considered a short-term capital gain, while income earned on the sale of land you have owned for more than a year is considered a long-term capital gain. The reason this is important is because they are taxed at different rates. In 2010, short-term capital gains were taxed based on your federal income bracket, while long-term capital gains were taxed at a 15 percent rate. People with higher incomes will see significant tax savings, if the sale of land is taxed at the capital gain rate.

Investment Property

The IRS uses the capital gain rate to tax land that was purchased for investment purposes, such as a house that was used as a rental property. They also assess capital gains taxes on the sale of land on which a business was located, or on land that was used as part of business activities, such as a pasture where livestock grazed. However, if selling or developing land is the primary business of the seller, then the capital gains tax rate does not apply, and profits from the sale are taxed as business income. This is important, because if the IRS determines that buying and selling property is part of your business, they will exclude the sale of the land from the capital gains tax rate, and instead treat the sale as a business profit for tax purposes.

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