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If
a taxpayer buys many acres of land and then sells a portion of the land,
what is the gain on the sale?
What if you
bought 50 acres and are about to sell five of them?
In order to come
up with the cost of the five acres you're selling, you need to allocate
your cost from the original purchase. A simple allocation would be to take
the original cost of the 50 acres and divide it equally. For example, if
the original cost of the property was $50,000, then each acre has a cost
of $1,000 and the five acres to be sold would have a cost of $5,000.
If the five acres
you anticipate selling are more valuable than the remaining acreage, then
you should develop an allocation that increases the cost of that parcel.
For example, you might want to have an appraisal of the entire property.
Then allocate your original cost based on the value of the land you're
selling to the entire appraised value. For example, if the appraisal comes
in at $100,000 and you sell the five acres for $20,000, then 20 percent of
your original cost would be allocated to the portion sold. The Internal
Revenue Service will respect whichever method you use, as long as it's
reasonable.
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