Q. Eight years ago I paid $56,000 for a house on a 75 by 85-foot property with an adjoining 75 by 85-foot lot. An independent appraiser valued the unimproved lot at $10,000 if sold with the house and $12,500 if sold separately. I now plan to build a new home for myself and sell my present residence, now worth $125,000 now. The unimproved lot is probably worth $25,000 now. What federal income tax considerations should I be aware of and what steps do I need to take to minimize either ordinary income tax or capital gain taxes? F. M., District of Columbia.
A. I assume the residence your refer to in your question is your present "principal residence" within the meaning of the Internal Revenue Code. If so, you can take advantage of the tax deferrable provision that allows you to avoid paying taxes on any gain on the sale of your present principal residence. But your new principal residence must cost as much as or more than the price you receive from the sale of your present principal residence, and construction must beings within 19 months - and your occupancy within two years - of the day of sale of your present home.
Concerning your present property, if you consider the unimproved lot part of your home and use it as a garden or a family recreation area or something similar, then almost certainly it can be considered part of your present principal residence for tax purposes. If, on the other hand, you consider it a separate entity and not an integral part of your present principal residence, then almost certainly it can't be considered part of your present principal residence for tax purposes.
Your letter indicates you're a practicing attorney so I assume you do not come within the Internal Revenue Code definition of a "dealer" in real estate. If you do not, then even though the unimproved lot isn't part of or present principal residence you can defer taxes on any gain you might receive on the sale of the lot by entering, instead, into what is called a Section 1031 tax-deferred exchange of the lot for "like-kind" property.
If you sell the lot, your gain will be classified as a capital gain and you will be taxed at the lower capital gain tax rate.
Earl A. Snyder, a realtor, appraiser and attorney, answers questions only in this column. His address: 14909 Kalmia Dr., Laurel, Md. 20810.