In 2001, Joe purchased a home on 12.3 acres for $349,000. Last year, he refinanced and subdivided the lot into 5 lots. One lot was just over 6 acres, which he kept and built his new home on, and the other lots were split off as follows: ~1.3 acres with the old (existing) house on it, and three vacant ~1.5 acre building lots. This year, (calendar year 2017) he sold all four of the new parcels (the house and the three vacant lots) for a total price of $700,000. He lived in the old house until his new home was built this spring. The new home was started and completed entirely within 2017 as well.
Is that taxed at a capital gains rate, using the purchase price minus 6 of the original acres for the basis? =>>Correct
How do you do this calculation? Since it was owner occupied, some portion should be untaxable, but how much? =>In a way, this is a subdivision of land. you can then take advantage of the capital gains main residence exemption. Your capital gain on your home sale equals your selling proceeds minus your adjusted basis. The total cost of your home includes not only the price of the property itself, but also any fees you incurred in buying the home. In tax terms, this is called your adjusted basis. However, this does not include your financing costs. Your purchase price also increases by any substantial improvements you've made to the home while you owned it, but not normal wear and tear. For example, the cost of fixing a broken pipe doesn't count, but a septic system upgrade would
Or is it all taxable since he exceeded the $500k limit for an owner occupied residence?======>> corrrect;The exclusion on the sale of your principal home can include the sale of adjoining subdivided land, as long as the adjoining sub land was used as part of your main home. The sales of the home and the adjoining land have to occur within 2 years of each other. So you will have to sell your home as well to get the exclusion. If you only sell the adjoining sub land without selling the house, that is not considered sale of a principal residence and the exclusion would not apply. You would pay capital gains tax of 15% on the increase in the value of the parcel of sub land you are selling.
Can the fact that he built a new primary residence be taken into consideration?=>>As mentioned above; in general, you will have to pay CG tax. This does NOT qualify for the exclusion of the gain on your principal residence if you are not selling your principal residence! You'll have to determine the cost basis for the subdivided lot. You may need to research the value of similar lots or use a pro-rata portion of the land valuation based on the lot size. Once you do that you'll pay CG tax on the difference between the net sale price and the cost basis. Since you've owned it for over 1 year it will be taxed as a long-term CG.
Don't forget to adjust the basis downwards for the remaining portion of your property! That will be necessary when you sell it off as the reduced basis will affect the CG position of the remaining property at sale time