selling acreage

[Jim T]

My wife and I bought a house a little over a year ago with 33 acres. We are now looking to sell off about 25 acres. Does anyone know what type of tax implications we will face?

Would waiting over 2 years instead of 1 change anything?

How would our purchase price be allocated between the land and the house to determine our taxable profit?

What would we need to do with regard to our mortgage?

Are there any other related questions that I should be asking?

I'm sure I'll need to consult a CPA regardless, but I would like to have some rough idea of what we're getting ourselves into first. Any help will be appreciated.

[jakestorm]

ok, from my understanding no waiting 1 year, 2 year or 10 years will have no bearing cause you are still maintaining your home. you are just going to divide the land and sell off a portion of it. so techniclly you are still in the same residence. your APN will probably be the same and your address will be the same.

as far as taxes it is best to talk to a tax attorney or cpa or both, but it would be prorated based on the purchase price, there will be a value based on the property and then can be broken down per acre for cost to get a tax basis for the 25 acres.

hmm the mortgage that is a good question, i would think if you have owned it awhile then it will not be a problem cause you should still be under the LTV ratio you could just play it by ear and just keep making your payments cause the mortgage is on the same house and same address, yes the land is part of the value, but unless you want to refi to do this, maybe wait till it is all done and you can refi after it is a smaller lot.

are you selling off all 25 acres in 1 parcel or you going to sell a few parcels?

have you talked with city/county officials about spliting, and their requirements for the area. like some areas only let 20 acre parcels and larger, some are 5 acres, 1 acre etc etc.

may i ask why you want to sell the land and what state and area are you in?

[Jim T]

I do want to re-finance. When we bought this property, our mortgage broker screwed us at the last minute and we had to scramble to get one. Apparently the loan we pre-qualified for didn't accomadate the number of acres we were buying, so we had to settle for a pretty terrible substitute. One of the reasons we are thinking of selling this acreage is to be better able to find a good rate on our re-finance.

We are planning to sell off all ~25 acres in 1 parcel, and are thinking of putting in a restriction so that it can't be sub-divided into less than a few acres. We don't really want a sub-developement full of crappy little houses on .0001 acres in our backyard. We haven't talked to county officials, but there shouldn't be any problems in that regard: two owners back, 5 acres were split off to build her daughter a house.

We live in South Carolina. We never experienced the huge growth in real estate prices that many areas of the country did, and so we don't seem to be suffering the consequences of falling prices either. This area (around Greenville) has enjoyed steady population growth, and a similarly steady increase in real estate prices. My wife just this morning saw a report on TV to the effect that housing prices in this area were still increasing in contrast to much of the rest of the country.

In addition to the above mentioned reason to sell, we almost never go to the acreage in question. As it's not being used, I don't feel like buying a tractor to bushhog it every few months and I don't feel like paying somebody to do it either. So it is just sitting there useless.

I recently spoke with a real estate agent who felt that we could get about 20K/acre. Ignoring taxes and the realtor fees, if we sold at that price we would then be essentially free-rolling our house and remaining acreage - plus it would make it easier to sell what we have left if we wanted to...

Finally, we would like to make a number of improvements to our house, and this would be a great way to pay for them.

[Big TR]

I'm not completely versed in this situation, but I don't believe that waiting 1, 2 or 10 years will have any impact on your tax situation. The home sale tax exemption is for actually selling your home. You will be staying in your home, not moving.

I think your taxable profit would be like so:

2005: Paid $100 for house and land.
2006: Have an appraiser value your property today assuming you that you both have and don't have the additional land. Let's assume the entire property appraises at $115, smaller property is $95. The FMV of the acreage is $20. $20/$115 = 17%. 17% is the rate you would apply to your original $100 purchase price. So your basis would be $17. You pay taxes on anything over $17. Your house now has a stepped down basis of only $83 if/when you eventually sell it.

As for the $20k/acre price suggestion, make sure you take into account the fact that the agent might not have understood your stipulation that the parcels cannot be split into small lots. THis might decrease your price per acre.

Consult your mortgage company regarding what to do about your mortgage. My guess is that they probably won't care, as the land cost probably wasn't a significant part of the overall purchase price. If they do care, you will have the funds to pay down the part of the mortgage that they are concerned about.

I would suggest going to the county planning office to see what you can and can't do with regards to your sitpulation on sub-division of the property. As you stated, consult a tax accountant pronto.

[jakestorm]

well it sounds like you are moving in the right direction i would go to the county/city and have a talk with them, I have no knowledge of SC, but i do know in most states there are limits to acreage splits. Usually you can split a large parcel into 4 lots with it being considered a minor subdivision or split. which no utilities would need to be provided and if you split your 25 acres or so into 3 lots it might be easier to sell them cause you dont have to sell all of them to one person. but you still can list them to sell all together so if someone wants all 3 they still can buy them.

if selling the lots pays off your mortgage then you are sitting pretty and if the need ever arises for a refi you can dictate the terms a lot easier when you own your house free and clear. good luck email me if you have any other questions