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Can I sell 2/3s of my land and take a one time $500,000 exemption in full?

Santa Barbara, CA |

Aggressive taxman has recommended I sell 20 acres of land in Santa Barbara to my children. His advice is I sell my dwelling and build a brand new house on the same land.

If I sell 2/3s of my land and take the IRS code 121 exemption in full, I am afraid the IRS can challenge this. how can I sell two-thirds and qualify?

I want to minimize my capital gains but I don't want to end up owing the IRS along with property taxes if my property is reassessed five years down the road. Should I seek a tax attorney, my tax man is not a CPA , the contract lawyer has drawn up the plan. Is this legal?

I don't know if california law demands I inform them of the property sale, update information with our local tax man, or keep my tax rate under 1974s price I pa

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Attorney answers 2


I doubt anyone here is going to stick their neck out, despite disclaimers, and advise you that your concerns are not legitimate.

I would definitely get a second opinion from a CPA or tax attorney and/or a trust and estate attorney. I think your tax man may be seeing through myopic glasses. There are other ways to accomplish the same or similar result (avoiding capital gains tax on your principal residence) depending on your situation and wishes.

One issue which immediately comes to mind is whether the property, itself, may be subdivided. Unless the parcels are separately identified in the deed and therefore can be divided as you suggest – there could be a major impediment to your plan.

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An answer to this is a bit complicated, and I would have to understand what you are really trying to accomplish. If it is just about capital gains, I agree with the other attorney that there may be problems with selling a porition. If you sell the property to anyone, there will be a reassessment of property taxes. It is unclear to me, is your residence already a part of the land? How old are you? There are a couple of estate planning issues to consider. If all of the property includes your residence, you could gift it to your children, but retain a lifetime right to occupy the property. This is an incomplete gift for IRS purposes (the property stays in your estate for estate tax) so no gift tax; and it allows a step up in basis when you died (so no capital gains tax to your children if they sell the property soon after your death. Assuming your residence is involved, there would be an exclusion of reassessment of property taxes, so the children would enjoy the tax rate you currently pay. If you sell it to them, there will be a reassessment.

Alternatively, you could gift the property into an Irrevocable Trust, also holding back a lifetime occupancy right. Same situation as above.

If you gift to the children outright, without the occupancy right, you would be subject to gift tax (but you currently have a $5 million lifetime exemption from gift tax that could be utilized), and the children would acquire the basis that you have in the property for capital gains purposes.

Or, you can put the property into a family limited partnership or limited liability company, but I am not sure this fits your needs.

All of the above is based on the property being your residence. If it is income property or undeveloped property I would have a different answer. I think you should see a knowledgeable estate planning attorney. I have found that tax attorneys are way to focused on taxes, and do not really understand what can be done with estate planning.

Hope this helps.