Splitting a parcel

[Loc R.]

Let's say I buy a property with 2 buildings on it, and have a mortgage against the property.

Let's now say I split the property into 2 parcels, sell one and keep the other.

How would the lender (normally) react?

How is this treated, tax-wise?

[Dave Toelkes]

Originally posted by SolidReturns:

How is this treated, tax-wise?

When you subdivide your property, each resulting parcel will have a new assessed value -- both for the land and for the improvements. Your tax assessor will reassess the properties and notify you of the new valuations.

Once you have your new valuations, you prorate your adjusted cost basis between the two properties. When you sell one property, the cost basis allocated to that property is used to determine your taxable profit or loss.

For example, let's say you paid $100K for your property. You subdivide and the tax assessor values the two separate properties at $60K and $90K. Since $60K is 40% of the combined value of both properties, you allocate 40% of your original cost basis to this first property. With $40K allocated to the cost basis for the first property, the balance of your original cost basis, or $60K, becomes the cost basis for the other property.

If you made any capital improvements to either property, add the cost of your capital improvements to the cost basis for that property.

Assuming you made no capital improvements and you sell the $40K property for $75K, your taxable profit is $35K.

The cost basis calculations can get more involved if you depreciated one or both properties or made landscaping improvements to a common area for the benefit of both properties.

If you need help with your numbers, suggest you get your CPA's assistance.