Subdivided Personality

Today TaxMama hears from Keith in Wisconsin, who poses this dilemma. “I have resided in my principal residence for three years, uninterrupted. It is on 6.3 acres of land. Two years ago, I had the land subdivided into two lots, one with the house on it, the other vacant land.

If I sell both in one transaction, does the entire sale qualify for the personal residence exemption?

What’s if I sell the house now, then the vacant lot later to the same person? Do both transactions qualify? Would it matter whether both transactions were in the same year?

And If I sell only the house, then sell the vacant land later to another party, would I have to do a like kind exchange to avoid tax?

I’m sure this situation occurs, but I can’t find anything on the IRS site that specifically addresses it. “

Dear Keith,

This is kind of a gray area.

You bought the whole property as a principal residence. And if you sell the whole property at the same time, even though you’ve subdivided it, you can probably still treat the whole transaction as the sale of your residence.

If you sell the two lots separately? To the same person, in the same year? I don’t think so.

Why? First of all, to take advantage of the personal residence exclusion, you may only use it on one sale every two years. So if you have two sales taking place in one year, you may only use the exclusion on one of the sales.

So, if you’re planning to sell both lots to the same person, in the same year, consider getting a comfortable down payment on the first lot, with a lease with option to buy. And then sell
both lots in one transaction later in the year when they can afford to close the sale on both lots.

As to your third situation, selling the house, then the lot to a different party – again, you have two sales in the same year. It would probably be safer to do a like-kind exchange to avoid the taxes on one of the sales.

But you may want to pay a good local tax professional to do some research on this matter. IRS won’t have anything on this in the Tax Code. It’s too specific a situation. But there will be case
law covering this kind of transaction – I am sure it’s not that unusual.

And of course, keep watching the blog archives at TaxTwist.com and the member forum in TaxMama’s Parlor. You’re apt to see tax professionals responding to this with suggestions and notes.

And remember, you’ll find answers to questions about capital gains and all kinds of tax issues, free. Where? Where else? At TaxMama.com

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