Tax Planning with Land Sales

Most people are aware of the basic rules regarding capital gains tax – in short, the gain is the difference between your acquisition cost and the sales price.  Like with most rules, there are several exceptions and that allows for some planning opportunities.

The homestead exemption is the most common exception.  There are caps on this exemption based on marital status and you must have lived in your home at least two years to qualify.

If you keep your property until death your basis steps up to the fair market value at death.  In other words, if your heirs sell your property shortly after your death, they can avoid this capital gains tax.  This exception does not apply if you gift this real estate to your heirs prior to your death.

If you sell real estate on a contract for deed, you can elect to report the gain over the life of the contract payments.  This does not reduce the tax but at least you don’t have to pay it all in one year.  Any interest charged on the contract, however, would also have to be reported as income.

Finally, you can do a 1031 tax-deferred exchange.  This also does not reduce the capital gains tax it just delays when the tax is due.  You can sell your real estate but then direct that the proceeds be transferred to an intermediary.  You then direct that intermediary to use those funds to buy a replacement property in your behalf.  That new property would then have a reduced basis just like your original property but that would not result in taxes until you sell that replacement property.  If this sounds like a good option, make sure you consult with someone that handles 1031 exchanges before you sign a purchase agreement on the first property.  You only have six months to find a replacement property so ideally you have already been looking and have a few in mind before you commit to the sale.

Please send any request for topic suggestions to  Although we cannot give you legal advice through the column, we can provide some general information that may be helpful for you to know.  Our purpose is to educate and we hope that you can take something new away from this column each time you read it.