Cost Basis after subdividing a property

[Michael Hellman]

Hello.  I purchased a home in late 2007.  I live in a small garage apartment for 4 years while renting out the main house.  The property had a large double lot in a nice neighborhood, so in 2014 I subdivided the lot and sold the empty portion of the lot to a builder, and kept the main house on the lot that remained.  During the time of the sale, the bank would not release me from the original mortgage, so most of the proceeds from the sale of the lot went towards paying off the mortgage.  At that time I did not have the cash to pay capital gains taxes on the sale of the newly subdivided lot so I reported it against the cost basis of the original purchase price.  In 2019 I sold the remaining house on the remaining lot.

My question is this.  I originally purchased the house for $214,000.  In 2014 I sold the subdivided lot for $173,00.  I sold the original house on the portion of the lot that was remaining in 2019 for $245,000.  Does this make my new cost basis $41,000 (214,000-173,000)?  I'm trying to figure this out in Turbotax which is anther challenge.  

[Kory Reynolds]

Yup you should have reported the gain when it occurred - there is no exception for not having cash. With your new found equity you could have taken out a loan on the equity to pay the tax.

An exception does exist which allows one to use the 121 exclusion for the sale of vacant land next to your residence, but that ship has sailed - the sales need to be within 2 years of each other plus a few other requirements. You are at 5 years out, so out of luck there.

Statute of limitation is 6 years when income/tax is substantially underreported. Doesn't really ever end in the case of civil tax fraud. 

Your approach of reducing the cost basis is sort of reasonable considering the situation, but know this is not the correct approach, you are just trying to right the wrong - it seems to me you would also at least want to be sure none of this portion of the gain benefitted from the 121 exclusion. Pay a professional, lay it all out, then they can put in the research to determine the 'best' route.