Land Sale......do I owe Federal Income Tax on the proceeds?

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Frizlefrak

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El Paso, Texas
I'll try to make it short and sweet

2001:  Bought 33 acre tract of raw land for $29,900, paid cash. 
2002: Drilled well on property.  $11,000
2003:  Had Septic Tank installed.  $3200

Roughly $44,100 of cost involved. 

2012:  Sold land.  Buyer paid cash, $55,000. No home was ever built.  Sold as raw land with improvements. We used to proceeds to pay off the mortgage on our residence, thus netting us 100% debt free (wooohooo!!)

We normally do our own taxes, but this year we're having a pro do them.  Does anybody know if we will owe income tax on the $10,900 profit on the land?  We will get the answer soon anyway, just curious if anyone has ever done something like this, and what your tax liability, if any, was?

If we owe it, no big deal....not trying to get out of anything we legitimately owe.  Would just like to budget for the extra tax.

T.I.A.
 
Budget for the extra tax.  I am not a tax pro or anything like that but I don't know of any deduction for a straight business profit.  Now if you have built a house and lived in it for the required years, different story.  If I am wrong, I'll buy a drink when and if we meet.
 
Jim Godward said:
Budget for the extra tax.  I am not a tax pro or anything like that but I don't know of any deduction for a straight business profit.  Now if you have built a house and lived in it for the required years, different story.  If I am wrong, I'll buy a drink when and if we meet.

Thanks Jim.  Pretty much what I figured.  I'm guessing around $2000 in extra federal tax, and we can cover it with no issues.  And when you boil it down, that's exactly what it was (or turned out to be)....a business venture that netted us almost $11K in profit. 

You can buy the first round, I'll catch the second one.  :)
 
I'm sure our resident accountants will be along but I would expect it to be taxed as a long term capital gain of $10,900.
 
The 11K would be a capital gain. For 2012, if you are in the 10 or 15 percent tax bracket for ordinary income, your capital gains tax rate is 0. If you are in a higher tax bracket, your capital gains rate is 15 percent.  I think.
 
I wonder if the property taxes I paid over the 11 years of ownership would be considered an expense?  I paid an average of about $350 a year on the land.  Over 11 years that would be $3850. 

I am terrified of the IRS.  Got into a jam with them in 2009, and I don't want a repeat.  We moved our IRA's from Bank of America to Chase.  They were re-deposited within 2 days into another IRA.  BOA sent the IRS a 1099 for the withdrawl.  Chase failed to send them the offsetting 5498....so as far as the IRS was concerned, we withdrew them completely at age 45 and 40 .  We got a letter from the IRS stating we owed $16K in taxes, penalties, and interest.  Naturally, the letter arrived late Friday afternoon....had to wait until Monday to see our banker.  Fun weekend.  They straightened it out, but it was 4 very stressful months later before we got a letter from the IRS stating our account had been returned to zero balance.

Never again. LOL
 
You would have been able to deduct the property taxes from your ordinary income each year you paid them. They do not increase the tax basis in the property, like the well and septic do (as improvements) to reduce your capital gain.  Relax, it will all work out fine.  :)
 
Frizlefrak said:
I'll try to make it short and sweet

2001:  Bought 33 acre tract of raw land for $29,900, paid cash. 
2002: Drilled well on property.  $11,000
2003:  Had Septic Tank installed.  $3200

Roughly $44,100 of cost involved. 

2012:  Sold land.  Buyer paid cash, $55,000. No home was ever built.  Sold as raw land with improvements. We used to proceeds to pay off the mortgage on our residence, thus netting us 100% debt free (wooohooo!!)

We normally do our own taxes, but this year we're having a pro do them.  Does anybody know if we will owe income tax on the $10,900 profit on the land?  We will get the answer soon anyway, just curious if anyone has ever done something like this, and what your tax liability, if any, was?

If we owe it, no big deal....not trying to get out of anything we legitimately owe.  Would just like to budget for the extra tax.

T.I.A.

Speaking as an old muncipal bureaucrat with some experience in land  -- SEE A PROFESSIONAL.  You probably want a CPA familiar with real estate dealings.
 
Frizlefrak said:
Oh yes.  This is the LAST area I want to get in over my head.  :)

Yew betchum.  The pro will need to take ini your current and past tax situation both state and federal.  This is something folks on the internet cannot do.
 
Not necessarily. I used Turbo Tax for the last 5 years to do my taxes. 2 years ago I sold a piece of property much like the OP. The tax program asked the appropriate questions, I answered them and the appropriate forms were filled out.  I didn't owe as much as I thought, and all was e-filed. Easy stuff.
 
SargeW said:
Not necessarily. I used Turbo Tax for the last 5 years to do my taxes. 2 years ago I sold a piece of property much like the OP. The tax program asked the appropriate questions, I answered them and the appropriate forms were filled out.  I didn't owe as much as I thought, and all was e-filed. Easy stuff.

Good info. 

And 5 years ago, I'd have taken a swing at it alone.  But that little fiasco in 2009 traumatized me a good one.  It wasn't the interrogation by the Chilean Secret Police that I expected....the gal at the local IRS office looked like my 3rd grade teacher and was very nice.....but no matter how nice your dentist is, you don't look forward to a root canal.  If the IRS comes a knockin' this time, I will ensure I have a pro on my side.    ;)

Either way, I'm OK with it.  The land proved to be a sound investment, and given real estate values precipitous drop in the last 5 years, I came out quite well.  It was a gorgeous plot of land at the base of the Capitan Mountains in New Mexico.  At one point we'd planned to retire there, but plans sometimes change.

Since the income was earned in New Mexico, I may owe state tax there.  Texas doesn't have a state income tax, but I'll have to see what if anything I'm on the hook for in NM.

 
I see you're going to a tax professional anyway. I'm sure the news will be that you owe capital gains tax. But the tax pro may be able to find deductible expenses and adjustments to the basis on the land.

Wendy
 
Long term capital gain.  I'm going through the same thing for last year.

However, mine is going to bite the heck out of us.  Was gifted land by mom over 20 plus year ago, basis at that time was $25k, sold for $167k, Yep I will owe 15% long term capital gains.  Really going to bit us this year.
 
frizlefrak also know that you can not roll an IRA twice in one year.  We rolled money out of hubbies 401K several years back after I researched and found their so called safe fund was in CDO's and other iffy investments, when all that crash was happening.  They were getting into cash it looked like pretty fast but I panicked and told hubby get out.  I rolled everything into 1 bank as that's all we could doe tim, he was overseas and noone else would touch it for me with a ten foot pole, we got it in and he signed off when he got home.  That was before they increased their deposit insurance.  So after the first of the year I rolled part into another bank.  They came after us too, but I had documentation.

For any of you with IRA's, or any kind of tax deferred savings, keep every piece of documentation so when you cash them you have a paper trail.  It's saved us.  Since many of you are retired I'm sure you know to do that.


My next challenge will be I bonds.  The rules said basically you could invest in most anything and put it in Roths.  I did for several years at a small town bank.  A large one in Chicago bought them out and did not want anything in their portfolios under a million dollars.  Needless to say I sure didn't have a million dollars so they made me take them out.  Now they were in longer then 5 years so they qualified as tax exempt, now the interesting thing will be is the interest drawn after the 5 years going to be tax exempt or taxable, that is going to be quite a challenge when I start cashing them, may just leave them to our son and let him deal with it.  Fun, fun. ;)
 
P.S.  Thanks, I didn't know that.  We only did it to consolidate everything into one bank, and Chase held our mortgage and other investments at the time.  I should have rolled it all into my 401K before the crash.  The IRA's recovered, but we have the same balance we had 5 years ago. 

I got lucky on my 401K.  I sorta saw the crash coming, and moved everything into "Retirement Bank Account" before the proverbial manure made contact with the ventilation device.  Next to zero interest, but FDIC insured and it works like a regular savings account.....your 401K savings aren't in the market, so no risk of loss.  Survived the crash nicely with all my 401K intact.  Afterwards, my company's stock got down the .33 a shared.  I dumped a bunch of money into it....I figured one of two scenarios....they go broke, and I lose the money and am out of a job....or they recover and I cash in nicely.  I sold 2 years later at $18 a share.  :) 

We are now debt free, no mortgage, and have a healthly nest egg.  It was touch and go for a while, but with some careful planning and a little luck on our side, we did OK.  Now I just have to avoid trouble with the IRS LOL. 
 
You're asking these guys? They can't even figure out what kind of toilet paper to use or how to operate their holding tanks.  ;D ;D ;D ;D ;D ;D ;D ;D
 
BruceinFL said:
You're asking these guys? They can't even figure out what kind of toilet paper to use or how to operate their holding tanks.  ;D ;D ;D ;D ;D ;D ;D ;D

No doubt.  ;D 

These is the same crowd that wound up with "poop pyramids" in the black tank.  YIKES!!!!  :p
 
Bruce I will only tell you what I know.  I was an accountant in my former life and keep up with what effects us and a bit more.  I did work for a human resources company for retirement investments for some time and though I also try to keep my " poop pyramid" under control, I might know about one or two other things pertaining to money.  After all its one of my favorite topics.  Feel free to research and ask your accountant about anything I say. But I have never stayed at that motel either He! He! ;D
 
PatrioticStabilist said:
My next challenge will be I bonds.
I am not sure I understand how the bank was involved. Were you able to buy i bonds & let the bank hold them as a Roth? If so since the i bonds are a government bond, were the i bonds in your name or the banks name as far as the government was concerned? Just curious how this works.
 

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