Lot purchased to build personal residence but later sold

[Steven Anderson]

In 2016 we bought a lot to build our personal residence. In 2017, we decided to build elsewhere and bought a different lot. We now have a contract to sell the original lot and it will close in January 2018 for 34% more than we bought it for, so a sizeable gain. How should we treat this gain, the original closing costs on purchase and any transaction costs on sale? I assume it’s a long term capital gain and should offset any passive losses from our rental portfolio right?

[Ashish Acharya]

@Steven Anderson , 

If you are a developer and have been selling land as a trade or businesses, IRS can be difficult on the change of the intent and might question your intent on this property as an investment property. Otherwise, you should be fine. Also, holding the land for more than a year can be used as one of the strong arguments to classify the land as an investment property. And hopefully, you have documentation of intent to treat the land lot for primary residence ( Email to broker or any sort of things) 

So, It would be a long-term capital gain. I am assuming you didn't rent out the land when you were holding it.  That makes the land an investment property not used in the rental activity. 

• Gain or loss from the disposition of property held for investment (other than passive activity property) is a portfolio income.

So if the property was not rented, portfolio income cannot offset any passive Loss from the rental activity. (Unfortunately, the rental activity is a passive income and portfolio is a non-passive) 

Also, if you itemize,  the expense accrued on the investment property is deductible over 2% of AGI (only on 2017 )and interest accrued on loan used to the investment is also deductible as an itemized deduction.