How the gain is calculated
Your adjusted basis in vacant land is generally what you paid for it, plus any improvements you made (surveys, grading, utility connections, roads) and closing costs. Subtracting your adjusted basis from the selling price gives your taxable gain.
Because there is no building, there is generally no depreciation and therefore no unrecaptured Section 1250 gain to worry about. The entire gain is a long-term capital gain taxed at 0%, 15%, or 20% (depending on your income), plus the 3.8% Net Investment Income Tax if your MAGI exceeds the thresholds.
Selling costs reduce your gain
Real estate commissions, attorney fees, transfer taxes, and other selling expenses reduce the amount realized, which in turn reduces your taxable gain. Keep records of all selling costs — they add up and can meaningfully shrink the taxable amount.
The Section 121 exclusion does not apply
The $250,000 / $500,000 home-sale exclusion under IRC § 121 applies only to a main home. Vacant land — even land adjacent to your home — does not qualify for the exclusion on its own. (In limited circumstances, land sold in a separate transaction in the same year as an adjacent principal residence may be included in the exclusion, but the rules are strict and this is a narrow exception.)
Frequently asked questions
Is there depreciation recapture on vacant land?
No. Land is never depreciated, so there is no depreciation to recapture. The entire gain is a capital gain.
Can I do a 1031 exchange on vacant land?
Yes. Vacant land held for investment qualifies as real property for 1031 purposes. You can exchange it for other real property, including improved property.
What if I subdivide and sell individual lots?
Frequent lot sales may be treated as dealer activity — taxable as ordinary income rather than capital gains. The distinction between investment property and dealer property depends on facts and circumstances, including your intent and the frequency of sales.
Sources
- IRS Topic No. 409 — Capital Gains and Losses
- IRS Publication 544 — Sales and Other Dispositions of Assets
- IRS — Like-Kind Exchanges (Real Estate Tax Tips)
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.