OT: Tax consequences of selling sub-divided property

[nitanee123]

Question/scenario for the board:

1. Property with 3 buildings is purchased for $1MM.
2. Property is subdivided into three parts (1 building each) and one of those sub-parcels is sold for $1MM. (The sale occurs more than 1 year after the initial purchase and the seller is not [should not] be considered a 'dealer' for IRS purposes.)

How is the tax consequence determined? Does the IRS assign a basis to each parcel at the time it is subdivided?

 

[ACGT]

Question/scenario for the board:

1. Property with 3 buildings is purchased for $1MM.
2. Property is subdivided into three parts (1 building each) and one of those sub-parcels is sold for $1MM. (The sale occurs more than 1 year after the initial purchase and the seller is not [should not] be considered a 'dealer' for IRS purposes.)

How is the tax consequence determined? Does the IRS assign a basis to each parcel at the time it is subdivided?

You assign the basis to the parcel sold. If the lot sizes and buildings are equivalent, divide the purchase price by three. If one building is larger and better constructed, you can allocate a larger portion of the purchase price to that building. An independent real estate appraisal would support the basis you report if audited, but a reasonable good faith estimate should suffice. If real estate tax bills are sent for each of the parcels, the assessments there could provide guidance.

 

[mrtailgate]

Question/scenario for the board:

1. Property with 3 buildings is purchased for $1MM.
2. Property is subdivided into three parts (1 building each) and one of those sub-parcels is sold for $1MM. (The sale occurs more than 1 year after the initial purchase and the seller is not [should not] be considered a 'dealer' for IRS purposes.)

How is the tax consequence determined? Does the IRS assign a basis to each parcel at the time it is subdivided?

As the one poster mentions, real estate bills might provide assistance if each parcel received separate property tax bills and the bills separated real and non-real property. Real estate is unique so imagine a case where you have a beach front lot that can be divided with one parcel being beachfront, the second subdivided property being the second parcel off the beachfront, etc. In this case, the actual beachfront lot is more valuable then the subdivided parcels that are the second and third parcels off the beach. Obviously, this is an extreme but it shows some of the potential issues involved. Besides the potential differences on the real property, you have a slew of differences arising from each of the buildings. One might be special purpose, better renovated, larger or smaller, etc. There are a ton of variables at play here.

If you have three separate assessments for the subdivided properties that may serve as the good faith basis allocation amongst the properties.

The issue here is that you are attempting basis computations on properties that are individually unique and which might have had differing levels of enhancement or improvement over time.

The IRS is not going to beat you up here that bad as long as you make a good faith reasonable effort and don't attempt something crazy like attributing all the original $1m purchase price to the divested lot.

 

[nitanee123]

Thanks for the info guys.