All Forum Posts by: Paul Clements

After skimming Gates, I think where the issue hangs up is there have been discussions in prior cases of what the principal residence in section 121 means. And in those cases the excludable sale must include a residence in order to be considered a sale of one's principal residence, specifying that a principal residence must include a house and/or a home at the time of sale. If the house is demolished or removed, you're no longer selling a residence and can't exclude the income.

In Bogley vs. Commissioner cited in Gates, it was ruled that a person can sell one's residence with part of the land, and subdivide out and sell another part of the land and include the gain from that subdivided land in the exclusion, as long as the subdivided land had also been used as the residence. The court also considered that the subdivided-land sale occurred within a year of the home sale. Again here, the deciding factor seems to have been that the home, the essence of the residence, was never demolished/removed, retaining the nature of the sale proceeds as being from the sale of a principal residence.

Also in Hale v. Commissioner cited in Gates: “The sale of a taxpayer's residence requires the sale of a structure which is used as a principal place of abode, and we have held that the sale of land without the structure does not constitute a sale of a residence within the meaning of section 1034.” This isn't directly related to 121, but bears on it.

From the Gates conclusion: "If a taxpayer sold some part of the underlying land but not the dwelling that the taxpayer used as a principal residence, the taxpayer could not defer the recognition of gain on the sale because the taxpayer did not sell his or her principal residence. . .If petitioners had sold their old home instead of demolishing it, they would have qualified for the section 121 exclusion. That is not what they did."

It was a majority decision, not unanimous though, and 4 judges dissented. The dissent agreed with the majority that the sale must include a permanent dwelling and that a principal-residence sale must include a home and improvements, but argued that the dwelling could be demolished and rebuilt as the petitioners had done, where even though the original house was gone, this would be defined as renovation of the original principal residence, not as a different residence, and not interrupt the 5-year period. 

I guess the exclusion just isn't favorable to manufactured or mobile homes. It's understandable, since one can gain property tax advantages by living in one of those as a non-permanent structure, yet can't 'double dip' by having tax-free land gains just by parking a trailer on a plot of land for 2 years at a time.

If the state was offering to buy the land with the structures on it and perform the demolitions itself, I think it would be excludable. But that's not what the offer is, it's for a vacant land purchase only.

No, it's basically a sub-department of the state environmental agency. They made an offer on the whole property that requires all buildings and infrastructure be fully removed. It's kind of a contingency but not quite, the offer is just for the vacant land and contract would only be executed once ground is fully cleared, inspected, maybe even tested, etc., not before like with a home-sale offer. Based on what I've seen with others, there could be 6-12 months between the demolition and actual sale. 

Not 100% sure if Gates applies here, because nothing would be added to the formerly residential land, only removed from it.

Though it could be argued that like the new house build, the demolition for conservation purposes was a value-add project that also resulted in a fundamental change in use (e.g. if one demolished one's house and plowed the fields of one's residential lot and sold it as a farm to the USDA or something, the gain would presumably not be excluded, even though nothing was added), and de-coupled the vacant land from its prior nature as a residence. Thoughts?

Just an FYI, this was a response in the tax forum from a CPA:

The homeowner must actually use and occupy the home as a principal residence. When the taxpayers demolished their existing principal residence, built a new home on the land, and sold it before ever occupying it, the Tax Court ruled the gain resulting from the sale of the never-occupied home did not qualify for exclusion under IRC Sec. 121 (Court case: Gates).

Not sure if Gates applies here, because nothing would be added to the formerly residential land, only removed from it. Though it could be argued that like the new house build, the demolition for conservation purposes was a value-add project that also resulted in a fundamental change in use (e.g. if one demolished one's house and plowed the fields of one's residence and sold it as a farm, the gain would presumably not be excluded even though nothing was added), and de-coupled the vacant land from its prior nature as a residence.

@Ashish Acharya   

OK thanks - so I'm assuming this would also apply if there were no home on the land to occupy? 

Yeah, I do lean towards you being right, since the deed representing a parcel without regard to its use is really the financial instrument transferred, and whatever happens on the land arguably falls under that umbrella and can't really be separated out.

(I'm copying this over from the buying/selling forum)

I've lived in a home for 20 years (it's a 50 year old, 1200 sq ft manufactured home, basically a double-wide trailer, that has very dated decor, drop ceiling, and in fair condition) and it's currently listed for sale. It's paid off. I inherited the land and home so I have little cost basis.

I have an offer from the state to buy the land for conservation purposes for $220k, but I'd have to demolish/remove the house and 3 large garages, several small sheds in disrepair, remove septic system, well, foundation of house etc. Two of the barns are cinderblock, one is wood. I also have a 16 panel solar array that's 5 years old that I could sell components of for maybe $5k with inverter batteries etc. I could also potentially sell off the home and a buyer could transport it elsewhere. Not sure how much I could get for it, maybe $10-15k since the moving costs would be high. So at that point I'm at about $235k. Then I'd probably have to pay about $30k to clear the land of all buildings and debris. So I'm back down to $205k. A lot of these are ballpark, offhand estimates and I have yet to verify them.

I also have an offer to buy the property as is for $170k. This is way lower than the asking price, but the highest offer after 2 years on the market. The reason the asking price is where it is for the home condition is because it's a 20 acre lot, some of which is wetlands but has several acres of good land, and it's in a fairly good location. If I demolish or sell off the manufactured home and then sell the land to state, can I claim the sale proceeds as principal residence since I lived on the land previously? or does the sale/demolition nullify that and turn it into a land sale, in which case the $225k may end up being less than the $170k sale of land with the home (minus agent commissions), which would be tax-free.

I know this is a pretty unusual scenario, but any help is appreciated. I have elsewhere I could live for a reasonable price temporarily, while the demolition occurred.

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(Here is a response I received on the other forum)

This is interesting...

Let's wait for some more professional opinions, but the sec121 exclusion rule is having having lived on the property as your primary residence 2 of the past 5 years. So, after you move out, you have 3 years to demolish everything and transfer it to the State. The condition/use of the property shouldn't matter. Just your sales price and cost basis.

Good luck.

This was my response to that:

That's a good point to bring and it may well provide a loophole, I thought it was straight 5 years not 2 of 5.

The complication though for me is whether the land sale would still treated as part of a residence sale, or would the residential link to/nature of the land cease to exist upon demolition. The 2 of 5 rule would be met, but my question is whether IRS considers the sale of vacant land (that I'd no longer be living on) 'part of' a home/residence sale, or would just exempt the very small amount I might receive from selling the manufactured home.

For what may or may not be a relevant comparison, if I sold the contents, fixtures, etc of my house before I sold the actual house, I'd imagine the contents sale would be taxable, but the sale of land and structure not. But if I sold it all together, house with contents and contents not separately valued, I'm guessing none of it would be taxable (within reason of course/assuming absence of fraud).

A similar scenario that might occur is when a house burns down. The owner is reimbursed by insurers then decides to demolish the remains and sell the land. I'm guessing the insurance proceeds there are not taxable, but the land sale is.

That's a good point to bring and it may well provide a loophole, I thought it was straight 5 years not 2 of 5. 

The complication though for me is whether the land sale would still treated as part of a residence sale, or would the residential link to/nature of the land cease to exist upon demolition. The 2 of 5 rule would be met, but my question is whether IRS considers the sale of vacant land (that I'd no longer be living on) 'part of' a home/residence sale, or would just exempt the very small amount I might receive from selling the manufactured home.

For what may or may not be a relevant comparison, if I sold the contents, fixtures, etc of my house before I sold the actual house, I'd imagine the contents sale would be taxable, but the sale of land and structure not. But if I sold it all together, house with contents and contents not separately valued, I'm guessing none of it would be taxable (within reason of course/assuming absence of fraud).

A similar scenario that might occur is when a house burns down. The owner is reimbursed by insurers then decides to demolish the remains and sell the land. I'm guessing the insurance proceeds there are not taxable, but the land sale is.

Hello,

I've lived in a home for 20 years (it's a 50 year old, 1200 sq ft modular home that has very dated decor, drop ceiling, and in fair condition) and it's currently listed for sale. It's paid off. I have an offer from the state to buy the land for conservation purposes for $220k, but I have to demolish the house and 3 large garages, several small sheds in disrepair, remove septic system, well, foundation of house etc. Two of the barns are cinderblock one is wood. I also have a 16 panel solar array that's 5 years old that I could sell for maybe $5k with inverter batteries etc. I could also potentially sell off the modular home and a buyer could transport it elsewhere. Not sure how much I could get for it, maybe $30k. So at that point I'm at about $255k. Then I'd probably have to pay about $30k to clear the land of all buildings and debris. So I'm back down to $225k. A lot of these are ballpark, offhand estimates and I have yet to verify them.

I also have an offer to buy the property as is for $170k. This is way lower than the asking price, but the highest offer after 2 years on the market. The reason the asking price is where it is for the home condition is because it's a 20 acre lot, some of which is wetlands but has several acres of good land, and it's in a fairly good location. If I sell (and move off property) or demolish the modular home and sell the land to state, can I claim the sale proceeds as principal residence since I lived on the land? or does the sale/demolition nullify that and turn it into a land sale, in which case the $225k may end up being less than the $170k sale of land with the home, which would be tax-free. 

I know this is a pretty unusual scenario, but any help is appreciated.