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I want to buy a home that sits on 1 acre for $1m (in the USA). I want to subdivide the land into two pieces and keep the new 0.5 acre parcel to build a home on for me. I have no interest in keeping the other parcel that has the house on it and intend to sell it off for $800k.

What would the taxes be on the sale of the $800k property? Is it a capital loss?

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    If I buy five shares in a company for $100 total, and I sell four of them for $80, is that a capital loss?
    – TripeHound
    Aug 5 at 22:03
  • @TripeHound but in this case the two shares are not equal. Aug 6 at 10:40
  • @mhoran_psprep No, but if 2 half-plots and house = $1M, and house + half-plot = $800k, then that's $200k per half-plot and $600k for the house. That is roughly equivalent to five equal-valued shares, with each half-plot equating to one share, and the house equating to three shares. Thus selling one half-plot + house equates to selling four (equal-value) shares.
    – TripeHound
    Aug 6 at 11:26
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    @TripeHound That's only if you assume that $800k was a fair market price for the house and half-acre. Maybe it was over market price, and the OP realized a gain. Maybe it was under, and the OP realized a loss. You need an estimate for the value of the house and land separately before you can decide what the houseless half-acre is worth.
    – chepner
    Aug 6 at 15:34
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Technically, your buying price is for the lot and the house on it. To calculate if you made a profit (or loss), you’ll have to split the buying price between the lot and the house.
But how? There’s no hard and fast rule, so you have some leeway. Often people just assume a 70/30 split, or a 60/40, or even 50/50. In the middle of San Francisco, the lot might be the 80%; in the middle of Iowa, the house might be 80%.

You need to get some comparison data for the location, and see what a similar house on a smaller lot goes for, or what an empty lot is sold for. You might want to print some examples in PDF and keep them, so you can show the basis of your estimates.

Then do the math. Example: you find another lot - same size, but no house - for 300k. You can now estimate your property to be 300k lot and 700k house, so your sale of half the lot plus the house is a loss of 50k: 800k (what you get) - 700k (house) - 150k (half the lot). You end up with a lot for a base of 150k (important if you ever sell it!) and a tax-relevant 50k loss.

In case you wonder: you’re allowed to pick examples that make the deal look in your favor, but it’s up to you to convince the IRS about validity of your estimates, if they ever audit you.

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Whether or not it's a capital loss depends on the value of the remaining 1/2 acre before you build the new house. If greater than $200K then obviously not a capital loss.

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  • thanks for the answer. Right now the land is just raw dirt, no improvements. But once I get ready to build I will need to put improvements in and the value will go up. Does that factor into this equation at all?
    – Westley
    Aug 6 at 3:58
  • @Westley of course it does: the value of the lot increases, but so does your cost.
    – RonJohn
    Aug 6 at 15:35
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Careful. According to the IRS it might not be a deductible capital loss regardless of the numbers unless it was a business transaction or investment.

A loss on the sale or exchange of personal use property, including a capital loss on the sale of your home used by you as your personal residence at the time of sale, or loss attributable to the part of your home used for personal purposes, isn't deductible. Only losses associated with property (or a portion of property), used in a trade or business and investment property (for example, stocks) are deductible.

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