Land Option – TaxMama.com

Today TaxMama hears from Jacqueline in the TaxQuips forum with this interesting question.
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“I own several acres of raw land. Several years ago a developer began to pay me a yearly amount for 4 years (as an option to purchase the land for a set price). I was advised not to report this income until the sale of land was final.
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The developer now has backed out of the deal and I retain full ownership of the land. How do I go about reporting this income now? The land never sold.”

Hi Jacqueline,

That’s an interesting question. And I’d be interested to see some other opinions.

Here are two ways to report the option.

1) As sale of an Option.

Long Term Capital gain – The full amount of the payments you received.

Cost or basis – Zero.

It’s possible that this may generate a 0% tax, or up to 15%, if you report it on a 2010 tax return, depending on your tax bracket.

2) Reduce the basis of the property.
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When you sell the land, your gain will be accordingly higher.

Without doing some time-intensive research, I was not able to find a quick reference for you.
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But I think either of these two ways to report the income will be acceptable to IRS.

Let’s see if anyone else has some other ideas.

And remember, you can find answers to all kinds of questions about land options, and other tax issues, free. Where? Where else? At www.TaxMama.com.

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