Including land in the home-sale exclusion

Dear Tax Talk,
In 1981 my wife and I bought 110 acres (more or less) and built a home on it. We have lived here since and are now selling. Will we have any capital gains taxes to pay because of the acreage that goes with the home? Thanks.
-- Dan

Dear Dan,
The law may or may not be on your side, depending on how you used the 110 acres. The general rule is that you can exclude gain on the sale of your home up to $500,000 if married and filing a joint return. You certainly meet the use and ownership tests of two years within the last five years.

The law also says that gain on vacant land adjacent to the property on which your home sits is considered part of your residence if used as part of your residence. The caveat is in the terms "vacant" and "use as a residence." If the land is used in farming, then there is a question about whether it can be considered "used as part of your residence."

The great thing about the Internal Revenue Service is that it uses consistent terminology throughout its regulations. Provisions dealing with personal residences in the estate tax area of the law go on to discuss what is considered used as a personal residence. Use as a farm would not be considered part of a personal residence, so that favorable provisions of the law under the estate tax sections would not apply. Conversely, then the IRS's probable position under the income tax part of the law would say that farming activities on the land would make that part of the land ineligible for gain exclusion.

Of course, you would still get an income exclusion on the part of the land that you truly use as your residence. In addition, since that is the improved part of the property, you would need to allocate the selling price based on its relative value to the total value of the property.

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