FEATURES
Tax Issues in the Sale of Appreciated Land By Daniel E. Smith, CPA
I
Daniel E. Smith, CPA, Marcum LLP
nvestors in land must give careful con-
long-term capital gains rates apply to the
4. The extent of subdividing, developing
sideration to their exit strategies from the
transaction. However, if land is held for
and improving the land that was done to
time of acquisition. An investor’s goal in
sale to customers in the ordinary course of
increase sales.
any investment is that it will appreciate
business, the investor may be considered
over time. The length of time and the manner
a dealer in real estate. The land would be
in which the investment is held affects how
considered inventory, and the sale would be
the appreciation of the investment is taxed
taxed as ordinary income rather than as a
upon disposal of the asset.
long-term capital gain.
In general, gains on the disposal of most
Whether land held by a taxpayer is a capital
assets held in excess of one year are taxed at
asset turns on whether it is held primarily
long-term capital gains rates. Federal long-
for sale to customers. When there are both
term capital gains rates range from 0% to
business and investment motives for holding
20%, depending upon an investor’s taxable
a particular parcel of land, the taxpayer’s
income in the year of disposal. Investors
principal motivation for holding the property
The distinguishing factor between capital
with high levels of investment income could
will determine whether it is a “capital asset”
gain treatment and ordinary income treat-
also be subject to the 3.8% net investment
or held “primarily for sale to customers.”
ment is the investor’s intent for holding the
income tax. Assets that are held for less
Several court cases give investors seven
land. An investor who holds a parcel of real
than one year are taxed as short-term capital
factors that should be considered in making
estate primarily for sale to customers during
gains, which are taxed at ordinary income
the determination:
the investor’s trade or business is taxed on
5. Use of a business office and advertising for sale of the land. 6. Character and degree of supervision and control that the investor exercised over any
depending upon the investor’s taxable in-
the sale of the land.
1. The nature and purposes of the acquisition
investor who holds a parcel of real estate for
of the land and duration of the ownership.
speculation or investment does not hold the property primarily for sale to customers and
Short-term capital gains could also be subject to the 3.8% net investment income tax
7. Time and effort that the investor devotes to
any gains at ordinary income tax rates. An
tax rates. The maximum rate for individuals in 2022 is 37%.
representative selling the land.
2. The extent and nature of taxpayer’s efforts to sell the land.
so is entitled to capital gain treatment on the sale of the property.
come in the year of disposal. 3. The number, extent, continuity and subWhen land is sold, it is often assumed that
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stantiality of the sales.
Investors with a large gain on the sale of land o#en find themselves trying to piece together
