Tax Obligations for Selling Land

The profit or loss from the sale of land, as with any other property sale, has a tax obligation. You must report the sale of the land to the IRS. Any profit you make is classified as a capital gain and is subject to taxation, but the amount you actually pay depends on how you obtained the land, the profit you made and how long you owned the property. Basically the taxable amount is the resulting amount when you deduct the sale price from the price you originally paid for the land. Add this information to IRS Form 1099-S in the year you sell the property.

The IRS considers any property you own as a capital asset. When you sell this asset it is considered a capital gain and the IRS requires you to pay taxes on the gain. Obtaining the gain amount is a matter of deducting the original purchase price and any expenses associated with selling the property from the sale price.

Although profit is a gain and is taxable, the length of time you hold the property does affect your tax filing in the year you sell the property. Property held for longer than a year has a tax rate of 15 percent and people in the low-income tax rate who hold a vacant lot for at least this term pay a 0 percent tax rate on long-term capital gains. However, taxes you pay on short-term gains require payment at a higher rate. Generally, this is the same rate as your income tax rate, which could be as much as 35 percent.

Enter any loss you experience from selling the property on Schedule D of the IRS Form 1040. To get the amount of loss you subtract the selling amount from the amount you paid for the property. This amount is placed between parenthesis on line 16 of Schedule D. So if you experienced a loss of $10,000 you would write it like this ($10,000). This loss can include the expenses you made to sell the property. Bear in mind that you may report a greater loss than that allowed by the IRS, as it has a limit of $3,000 or $1,500 if married and filing separately. If you sold at a loss you can deduct the loss limit from your income for the year you sold the property.

Even recipients of gifts of land have tax obligations when selling the property. The tax basis or original cost of the land is not "0," but is the cost of the land at the time of the gift. To obtain the capital gains or loss amount you need to deduct the original cost amount and any expenses made to sell the property from the sale price.