Jessica Lambert

Selling land for more than you originally paid does not necessarily mean you will be taxed on the entire sale price. It also does not mean the amount deposited into your bank account will be the same as your taxable gain. Several different numbers come into play when land is sold. Understanding the difference between the sale price, net proceeds and taxable gain can help you prepare for a conversation with your accountant before listing your property. As discussed in our previous article, “Build Your Land Transaction Team Before Buying or Selling,” tax planning should begin before the transaction. Your LandGuy can help you understand the real estate process, while your accountant or tax professional can explain how the sale may affect your individual tax situation. What Is a Capital Gain? In simple terms, a capital gain occurs when you sell an asset for more than your adjusted basis in that asset. Land held for personal or investment purposes is generally considered a capital asset, although different rules may apply to land used in a business or farming operation. A simplified calculation looks like this: Amount realized from the sale – adjusted basis = gain or loss The actual calculation can be more complicated, especially when the property includes depreciable buildings, farm improvements, equipment or multiple owners. According to the IRS, a capital gain generally occurs when an asset is sold for more than its adjusted basis. A capital loss occurs when it is sold for less. Additional information is available through IRS Topic No. 409: Capital Gains and Losses. Sale Price, Net Proceeds and Taxable Gain Are Different These three terms are sometimes used interchangeably, but they do not mean the same thing. Sale Price The sale price is the amount the buyer agrees to pay for the property. For example, if a property is under contract for $500,000, its sale price is $500,000. Net Proceeds Net proceeds are what the seller receives after certain costs and obligations are paid at closing. These may include: A mortgage or other loan payoff Brokerage fees Attorney or title company fees Certain closing expenses Property tax prorations Other agreed-upon expenses If the property sells for $500,000, the seller may receive considerably less than $500,000 after these items are paid. Taxable Gain Taxable gain is calculated using the tax rules that apply to the property. It is not simply the sale price, and it is not necessarily the amount the seller receives at closing. One important distinction is that paying off a mortgage reduces the seller’s net proceeds, but it generally does not reduce the gain for tax purposes. This is one reason sellers should not estimate their potential tax bill based only on the closing check. What Is Adjusted Basis? Basis is generally the starting value used to calculate gain or loss when property is sold. For land that was purchased, the starting basis is usually the purchase price plus certain acquisition costs. That number may change during the time you own the property. After those changes are considered, it becomes your adjusted basis. Items that may increase basis include qualifying improvements such as: Constructing a building Installing permanent fencing Adding drainage tile Building a pond Installing roads or permanent access improvements Adding utilities Completing major renovations Paying certain legal, surveying or transaction expenses connected to the property Routine maintenance and repairs are generally treated differently from permanent improvements. For example, replacing an entire roof may be handled differently than repairing a small leak. Your tax professional can determine how a particular expense should be classified. Basis may also be reduced by items such as depreciation previously claimed on qualifying buildings or improvements. The IRS provides a more detailed explanation through Topic No. 703: Basis of Assets and Publication 551: Basis of Assets. A Simplified Example Suppose a landowner purchased a property for $200,000 and later completed $40,000 in qualifying improvements. During ownership, $20,000 in depreciation was claimed on eligible improvements. The simplified adjusted basis might be: Original purchase price: $200,000 Plus qualifying improvements: $40,000 Minus depreciation claimed: $20,000 Adjusted basis: $220,000 Now suppose the property sells for $350,000 and the seller has $25,000 in qualifying selling expenses. The simplified calculation might be: Sale price: $350,000 Minus selling expenses: $25,000 Amount realized: $325,000 Minus adjusted basis: $220,000 Potential gain: $105,000 This example is for illustration only. The amount that must be reported and how it is taxed will depend on the property, its use, depreciation, ownership structure and the seller’s overall tax situation. Inherited Land May Have a Different Basis The basis of inherited land is not necessarily what the previous owner originally paid for it. In many cases, inherited property receives a basis based on its fair market value at the date of the previous owner’s death. Exceptions and special rules can apply, so the seller should not assume a value without reviewing the estate records with a tax professional. Helpful records may include: Estate documents The date of death An appraisal completed for the estate County property records Information about improvements A prior owner’s depreciation records Documents showing how ownership was transferred If an appraisal was not completed when the property was inherited, determining its value years later may require additional research or a retrospective appraisal. Gifted Land May Also Require a Different Calculation Land received as a gift is generally treated differently from inherited land. In many situations, the recipient’s basis is connected to the donor’s adjusted basis rather than the property’s value when the gift was made. This is sometimes called a carryover basis. However, different calculations may apply when the property’s value at the time of the gift was lower than the donor’s basis. Because gifted-property rules can become complicated, sellers should gather any available records from the person who transferred the land. These may include the original purchase documents, improvement expenses, depreciation records and gift-tax documents. Short-Term Versus Long-Term Ownership How long the seller has owned the property may affect how the gain is classified. Generally: Property held for one year or less results in a short-term gain or loss. Property held for more than one year results in a long-term gain or loss. Short-term gains are generally taxed differently from long-term gains. The applicable rate depends on the seller’s income, filing status and other circumstances. Inherited property and certain other situations may follow special holding-period rules. Sellers should ask their tax professional how their ownership history affects the transaction. What Is Depreciation Recapture? Land itself generally cannot be depreciated. However, certain assets located on the property may qualify for depreciation, including some buildings, fences, drainage systems and other improvements. Depreciation can reduce taxable income while the property is owned. When the property is sold, however, some of the gain connected to previously claimed depreciation may be taxed differently from the remaining capital gain. This is commonly referred to as depreciation recapture. For example, a farm sale may include: Nondepreciable land A depreciable machine shed Grain-storage improvements Fencing Drainage improvements Equipment or other personal property The sale price may need to be allocated among these assets. The allocation can affect how the gain is calculated and reported. Sellers who have claimed depreciation should provide their complete depreciation schedules to their accountant before the property is listed. The IRS discusses these rules in greater detail in Publication 544: Sales and Other Dispositions of Assets. Remember State Taxes Federal taxes are only part of the picture. A land sale may also create state income-tax obligations. State rules vary, and the seller’s state of residence may not be the only state involved. If the property is located in another state, the seller may need to file or pay taxes there as well. LandGuys serves buyers and sellers across Illinois, Iowa, Missouri, Wisconsin and Kansas. Because each state has its own tax laws, sellers should work with a professional who understands the rules affecting both the property’s location and the seller’s residence. Records to Gather Before Listing A tax professional can provide better guidance when accurate records are available. Before listing, sellers should begin gathering: The original purchase agreement The original closing statement The deed and ownership records Surveys and legal descriptions Receipts for permanent improvements Construction contracts and invoices Depreciation schedules Farm or rental income records Prior tax returns related to the property Estate or inheritance documents Gift documents Appraisals Records of casualty losses or insurance payments Information about prior partial sales or easements Loan and mortgage information Do not wait until closing to begin this search. Older documents can take time to locate, especially when land has been owned for decades or has passed through multiple generations. Start With an Estimate, Not an Assumption Understanding capital gains when selling land begins with determining the property’s adjusted basis. The sale price alone does not tell you how much gain you may have, how the gain will be classified or what you may owe. Before listing, ask your accountant to help you estimate: Your adjusted basis Your expected selling expenses Your potential federal and state gain Any depreciation-related tax consequences Your estimated net proceeds Whether another transaction structure should be considered Your LandGuy can provide information about the property’s potential market value and expected selling process. Your tax professional can then use that information, along with your records, to help you understand the possible tax consequences. Planning ahead gives you time to gather documents, evaluate your options and make decisions based on more than the sale price. Learn More For additional information, visit: IRS Topic No. 409: Capital Gains and Losses IRS Topic No. 703: Basis of Assets IRS Publication 551: Basis of Assets IRS Publication 544: Sales and Other Dispositions of Assets This article is provided for general educational purposes and is not intended as tax, legal or financial advice. Tax treatment depends on the property, its use and the owner’s individual circumstances. Consult a qualified tax professional, attorney or lender before making transaction decisions.

Buying or selling rural land involves more than agreeing on a price and choosing a closing date. Financing, taxes, title work, property use and long-term ownership plans can all influence how a transaction should be structured. That is why one of the best first steps is assembling the right land transaction team. A land broker may guide the real estate process, but lenders, accountants, attorneys and other professionals each provide expertise that can help you make informed decisions. Starting these conversations early can also help prevent delays and unexpected complications once the property is under contract. Start Planning Before the Transaction Some buyers and sellers wait until an offer is accepted to contact their lender, accountant or attorney. By then, important deadlines may already be approaching, and certain options may be more difficult or impossible to pursue. Before listing or purchasing land, consider: How the property is currently used How the buyer intends to use it How the purchase will be financed Whether the property produces income How ownership will be held Whether the seller intends to purchase another property What tax considerations could result from the sale You do not need to have every answer before speaking with a land broker. However, identifying these questions early helps determine which professionals should be involved and when their guidance will be needed. The Role of Your Land Broker A knowledgeable land broker serves as the central point of contact for the real estate transaction. At LandGuys, we help you understand the market, prepare the property for sale, evaluate opportunities and coordinate the steps leading to closing. For sellers, your LandGuys broker can assist with: Evaluating the property’s market value Developing a marketing strategy Gathering property information Reviewing offers and transaction terms Coordinating showings, inspections and other due diligence Communicating with the buyer’s representatives Helping keep the transaction on schedule For buyers, your LandGuys broker may help with: Identifying properties that fit the your goals Evaluating access, improvements and property features Understanding comparable land sales Preparing an offer Coordinating inspections and due diligence Communicating with the lender, title company and seller’s broker A broker can also recognize when a question should be directed to another professional. Brokers do not replace the tax, legal or lending professionals on your land transaction team. The Role of Your Accountant or Tax Professional An accountant or qualified tax professional can help buyers and sellers understand how a transaction may affect their individual tax situation. For sellers, this conversation may include: The property’s original and adjusted basis Potential capital gain The effect of inherited or gifted ownership Improvements made during the ownership period Depreciation previously claimed on buildings or other assets Whether an installment sale may be appropriate Whether a 1031 exchange should be considered Estimated taxes resulting from the sale For buyers, an accountant may help evaluate: How the property should be owned How the purchase price should be allocated among assets Which records should be retained How income from farming, rent, hunting leases or conservation programs may be reported Whether certain improvements or assets may qualify for depreciation How the purchase fits into the buyer’s broader financial plans Bring your tax professional into the conversation before the purchase agreement or closing structure is finalized. The details of the transaction can affect the available options. The Role of Your Lender Unless the purchase will be completed entirely with available cash, buyers should speak with an agricultural or rural real estate lender before making an offer. Land financing can differ from financing a traditional residential property. The lender may consider the property’s agricultural income, improvements, access, intended use and appraised value, along with the buyer’s financial position. Topics to discuss with a lender include: Down payment requirements Loan term and amortization Fixed or adjustable interest rates Balloon payments Required collateral Appraisal requirements Farm or rental income documentation Financing for buildings or future improvements Prepayment penalties Estimated closing costs The timeline for loan approval A prequalification or early financial review can help buyers establish a realistic price range. It may also strengthen an offer by showing the seller that financing preparations are underway. Buyers planning to use proceeds from another property sale should tell the lender as early as possible, especially if the purchase may be part of a 1031 exchange. The Role of a Real Estate Attorney A real estate attorney can provide legal guidance concerning the ownership, transfer and use of the property. Depending on the property and the state where it is located, an attorney may assist with: Reviewing or preparing the purchase agreement Advising on ownership structures Reviewing easements and access rights Evaluating leases and existing agreements Addressing boundary or title concerns Reviewing entity documents Explaining legal obligations created by the transaction Assisting with estate or succession planning Coordinating the closing process Rural properties may include farm leases, hunting leases, conservation agreements, shared access, mineral rights, timber rights or other interests that deserve careful review. An attorney can explain how these items may affect the buyer or seller. When a Qualified Intermediary May Be Needed A seller considering a 1031 exchange should contact a qualified intermediary before the property closes. A qualified intermediary facilitates the exchange and holds the sale proceeds while the seller identifies and purchases qualifying replacement property. The seller generally cannot receive or control the proceeds and then decide afterward to complete an exchange. Because 1031 exchanges include strict requirements and deadlines, the seller’s accountant, attorney, broker and qualified intermediary should communicate early in the process. Documents to Begin Gathering Organized records allow each professional to provide more useful guidance. Sellers may want to gather: The original purchase and closing documents Deeds and title information Surveys and legal descriptions Records of improvements Depreciation records Farm, hunting or residential leases Conservation program agreements Property tax statements Loan payoff information Documents related to an inheritance or gift Income and expense records associated with the property Buyers may want to prepare: Personal or business financial statements Recent tax returns Proof of available funds Loan prequalification documents Entity or partnership documents Proposed ownership information Plans for farming, leasing or improving the property Income projections when applicable Your accountant, lender or attorney may request additional documents based on the property and your circumstances. Ask the Right Questions Early Before buying or selling, consider asking: Who needs to be involved before we establish the transaction timeline? How could the property’s current use affect the sale? What records are needed to calculate the seller’s adjusted basis? How will the buyer finance the purchase? Could the ownership structure affect future decisions? Are there leases, easements or agreements that need to be reviewed? Is the seller considering another property purchase? Could a 1031 exchange be an option? What decisions must be made before the property closes? Not every land transaction requires the same combination of professionals. A straightforward cash purchase may have different needs than the sale of inherited farmland, an income-producing recreational property or a transaction involving multiple owners. The purpose of building a land transaction team is to make sure the right questions reach the right professionals at the right time. Preparation Creates a Better Path to Closing Good planning does not eliminate every challenge, but it can reduce surprises and give buyers and sellers more time to evaluate their options. Your LandGuy can help coordinate the real estate process, establish a practical timeline and keep communication moving among the parties involved. When your broker, accountant, lender, attorney and other professionals are working from the same information, you can approach the transaction with a clearer understanding of what to expect. Whether you are considering selling property or preparing to purchase your next piece of land, start the conversations before you need the answers. This article is provided for general educational purposes and is not intended as tax, legal or financial advice. Tax treatment depends on the property, its use and the owner’s individual circumstances. Consult a qualified tax professional, attorney or lender before making transaction decisions.

For many people, Labor Day offers a well-earned chance to slow down and enjoy one last long weekend of summer. The holiday helped bring structure to the American workday, including reasonable hours and regular time off. Those protections were important, but rural real estate has never fit neatly into an eight-to-five schedule. The drive behind every LandGuy is different. You are unlikely to hear a LandGuy say, “I’m off work now. I’ll get back to you tomorrow,” or “Sorry, I’m done working for the day.” Buyers,sellers and properties do not always operate on business hours, and neither do we. If a client needs an answer, a farm needs to be walked or an opportunity is moving, a LandGuy gets to work. The Work Happens When Clients Need It LandGuys brokers work around their clients, their properties and the realities of rural life. That can mean answering a seller’s question early in the morning, walking a farm after the workday ends or meeting a buyer on a Saturday when everyone can be there. In fact, evenings and weekends are often some of the busiest times for our brokers. Buyers may need to tour a property outside their regular working hours. Sellers may have questions after reviewing an offer with their family. A showing may need to account for weather, farming activity, hunting seasons or travel from another state. Opportunities do not always arrive during normal business hours, and strong customer service requires flexibility.That does not mean being busy simply for the sake of being busy. It means being dependable. Our brokers understand that buying or selling rural real estate is a major decision. Clients deserve timely communication, thoughtful guidance and a broker willing to meet them where they are. Better Brokers Build Better Businesses At our recent annual all-broker meeting, LandGuys brokers came together to strengthen their businesses, share what is working and learn from one another. Each broker brings different strengths, from farmland and wildlife habitat knowledge to marketing, negotiations and client communication. Growth begins by identifying where there is room to improve and learning from those who excel in that area. By sharing knowledge across markets and specialties, our brokers become better equipped to anticipate questions, manage transactions and guide clients through important decisions. Rural real estate is not for everyone. It requires initiative, patience, market knowledge and the drive to serve clients beyond traditional business hours. Many of the people we serve do not keep traditional hours either. Farmers, landowners and rural business owners often start before sunrise, work after sunset and use evenings or weekends to discuss a property. Our LandGuys understand that lifestyle because many of them live it themselves. Every property and every client brings a different set of goals and challenges. By combining individual drive with the experience and support of the entire LandGuys team, our brokers can provide dependable service when clients need it. Work Worth Doing Well Labor Day is an appropriate time to recognize hard work, but hard work alone is not the full measure of success. The goal is to do work that serves people well, continually improve how that work is done and help others improve alongside you. For LandGuys, that means being available when clients need us, learning from every transaction and using the strength of the team to deliver better service. It means recognizing the areas where we can improve and having the humility and drive to learn from someone who can help. The hours may not always be traditional. The properties rarely are, either. But for people with the drive to learn, serve and keep getting better, rural real estate is work worth doing. This Labor Day, we recognize the people whose hard work keeps our communities moving, including the LandGuys who give their time, knowledge and energy to serving their clients. If you are looking for someone who will give your property the attention it deserves, reach out. We are always happy to talk, no matter the hour. Every Property Tells a Story.™ Let LandGuys Tell Yours.