We bought at tax sale a vacant lot. We owned this vacant lot for more than 20 years until June 2014 when we sold and settled on it.
During our ownership we paid an attorney to have the cloud removed from the title, paid to have the lot cleaned, the grass cut, several trees removed, paid an architect for drawings and paid the zoning adjustment board a fee to present our petition for relief on our development. Our petition was denied.
Is any part of these efforts deductible from the sale price in our capital gains calculus? Thanks for your help!
We’d like to clarify some of the terminology. Now that you sold the lot, it appears you’re looking for ways to reduce the amount of taxes you might have to pay for the profit you have on the sale of the lot. If the ownership of the lot was an investment, you might have been able to deduct the costs of maintaining the lot from your annual federal income taxes.
However, we have to qualify our answer because vacant land is kind of special for federal income tax purposes. Since vacant land on its own does not produce income, and usually can’t produce income, the ownership of the vacant land differs from the ownership of an investment apartment building or strip center.
Your question really deals with ways to minimize the impact of federal taxes on the sale of land you’ve owned for 20 years or so. To the extent that the purchase was for investment purposes, you should be able to take the costs of purchasing and selling the land as an adjustment to the basis (term used to describe the cost of the land) you have in the land. These costs might include the cost to obtain title insurance, escrow closing costs, transfer taxes, real estate broker fees and other costs necessary to market and sell the property.
Then you ask about costs you had during the ownership of the land. Since it was a vacant lot then and now and no improvements have been made to the land, the removal of trees, cleaning of the lot and mowing might not stand the test with the IRS of a capital improvement that would reduce your federal income taxes (whether or not they are capital gains taxes).
The other expenses relating to the possible improvement of the lot and zoning issues could be capital expenses if the lot had been held for investment purposes. However, if the lot was purchased for personal use and those plans were for your personal home, we doubt that you could use those expenses to reduce your taxes.
On the other hand, the cleaning up of title issues seem to be akin to title insurance expenses and acquisition costs that you should be able to use as an adjustment to the basis of the land.
You’d have to talk to an accountant or enrolled agent to discuss what happened to the land and how you’ve owned it to determine whether any of the expenses can be used to reduce the taxes you now might owe on the sale of the lot.
As we noted, the true nature of your question seems to be whether you can increase the cost basis of the land to reduce the amount of taxes you owe on the sale.
Some of this question might turn on the intent you had when you purchased the lot and then whether you continued to hold it for personal use or for investment purposes. Since you’ve asked a complicated tax question, and we’re not accountants, we’d encourage you to talk to your accountant, your tax preparer or an enrolled agent as soon as possible. If you can’t find an accountant to work with you this close to April 15, consider filing for an extension (though be sure to pay any taxes you estimate are owed by April 15).
Ilyce R. Glink’s latest book is “Buy, Close, Move In!” Samuel J. Tamkin is a Chicago-based real estate lawyer. You can call Glink’s radio show (800-972-8255) from 11 a.m. to 1 p.m. Sundays. You can contact Glink and Tamkin at thinkglink.com.