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05-01-2017 06:12 PM
I inherited 25 acres of farmland in WV five years ago. It has a 200 year old house that no one lives in and some other falling down buildings. I keep it insured, pay property taxes, and keep the electricity turned on. I leased the land for “free”, just to keep it eaten down by cows and to have fences repaired, over the past three years. I want to sell the land to build my new house in TN.
I currently live in TN and own a house that I will sale after the new house is built. All money for the sale of my current house will be applied toward the total cost of the new house. There is no state income tax in TN. The new house in TN will cost more than the land being sold in WV and the cash-out of the sale of my current house combined. What will be my tax obligations on the sale of the land in WV and the house in TN?
Solved! Go to Solution.
05-01-2017 06:44 PM
Welcome to the H&R Block community.
So if you sell the land in West Virginia you'll have capital gains tax to pay on any gain on the sale since that is not your primary residence and it was inherited. Gain is equal to your realized amount on the sale less your adjusted basis in the property (your basis is equal to basis that the previous owner had in the property on the date of their passing + the cost of any improvements you made to the property since then). Because West Virginia has a state income tax you will need to file a West Virginia non-resident tax return in addition to your federal tax return if you have a taxable gain on the property there as you will owe WV state tax on it in addition to the federal capital gains tax. Most states have their own capital gains rate, so the tax may be more or it may be less than the federal capital gains tax.
Federal capital gains tax is either 0%, 15%, or 20% depending on your total income level. Most taxpayers fall into the 15% category.
There is some good news on your house in Tennessee. If you (1) have lived in that house for two out of the last five years, (2) have owned that house for two out of the last five years, and (3) have not claimed the exclusion of gain from the sale of a primary residence in the last two years, then you can exclude the first $250,000 worth of gain on the house in Tennessee form your taxable income. The exclusion is the first $500,000 worth of gain if you are married & filing jointly. You are correct that Tennessee has no state income tax so if you have any taxable gain you will only be looking at federal capital gains tax on the sale of the house in Tennessee.
If you have any other questions I'll be glad to help.
Senior Tax Advisor (Tampa, FL)