Land sale question

Few years ago, someone quick claim a lot to me due to she owed me money and pay me with a lot instead money. I sold the lot this year, next year in my income tax, how can I calculate the profit/lost?

how can I calculate the profit/lost?

Profit = sales_price - basis - expenses_to_sell

What’s your basis for the lot?
Do you have a sales contract spelling it out? ex: “Jim is transferring Lot 123 to AK in exchange for forgiveness of a loan of $10000 made from AK to Jim plus the $5.35 of interest from that loan”

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Few years ago, someone quick claim a lot to me

FYI - that’s probably a ‘quit claim’ deed, not a ‘quick claim’.

due to she owed me money and pay me with a lot instead money. I sold the lot this year, next year in my income tax, how can I calculate the profit/lost?

It’s important to use actual dates, instead of ‘this year’ and ‘next year’ to be sure that everyone is on the same page. So, you sold the lot in 2022, which will be documented on your 2022 tax return. Your 2022 tax return should be filed in 2023.

As far as figuring the profit/loss - you may actually have a few issues:

  • Do you know the fair market value (FMV) of the property at the time of the transfer? If not, you need to figure out a reasonable one, because that’s a fundamental requirement.

  • Do you have any documentation that shows the person acknowledged that the money was a loan that was owed to you (including any interest that was being charged or should have been charged)? If not, then it’s not clear that you can actually claim that the receipt of the property was to pay a debt - because there was no documentation of that debt nor that the there was an agreement to pay you back.

  • If you do have documentation of the debt that was owed to you, then for the year that the property was transferred to you, you should have declared the difference between the FMV and the debt as a gain or loss on your tax return. You also should have claimed any interest that was owed on the debt as ordinary income for that year.

  • If you don’t have documentation of the debt, then it would appear that the lot was actually gifted to you. When you receive a gift of property, you need to know the original owner’s basis in the property that was gifted it to you.

  • If the FMV at the time of the gift was more than the owner’s basis, then the owner’s basis becomes your basis. You would then add in any adjustments (like recording fees, title transfer fees, etc.) to figure your adjusted basis in the property, and figure your gain/loss as the sale price minus (your adjusted basis and the costs to sell).

  • If the FMV at the time of the gift was less than the owner’s basis, then it’s more complicated, as you need to figure whether you had a gain or loss based on both the original owner’s basis and based on the FMV at the time of the gift. I would suggest reading the example on page 9 of IRS Pub 551 https://www.irs.gov/pub/irs-pdf/p551.pdf

AJ

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No, I didn’t unfortunately. Now I have to figure it out what to do.

No, I didn’t unfortunately. Now I have to figure it out what to do.

So if you didn’t document that receiving the lot was actually repayment for money owed to you (and declare any income from repayment of that debt on your taxes for the year you received the property), then you gifted what was owed to you (and may need to file a gift tax return) and the prior lot owner gifted the lot to you. If you don’t have any documentation of what the basis for the lot’s prior owner was, and you aren’t able to get that information from the prior lot owner, you may at least be able to discern the price that the lot owner paid from public records - if the lot is located in a state that requires disclosure of sales prices. If you can’t determine the basis in any other way, it’s always an option to declare a cost basis of $0 plus your allowable initial transfer expenses and your costs to sell. (Or if the transfer deed to the owner you got the property from says something like “for $10 and other good and valuable consideration” then you would at least have a cost basis of $10 plus your allowble expenses.)

Takeaway from this:

Whenever property is transferred (including via quit claim), there are likely tax implications, even if no money changes hands. If you don’t understand what those implications are, you should be consulting a tax advisor. If you don’t and assume that there are no tax implications, you could be setting yourself up for a nasty surprise when you eventually transfer the property.

This should also be a lesson to those attempting to do their own estate planning.

AJ

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AJ wrote This should also be a lesson to those attempting to do their own estate planning.

The important word being “should”

The important word being “should”

Yeah, I know. But I see so many stories about people doing ‘estate planning’ that start with ‘Dad/Mom/Brother/Sister/someone else I’m not married to put me on the deed to the house’ that I just wanted to make the point again.

AJ

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AJ when I read you oft repeat advice, I can’t help but think of that ole phrase == a fool and his money are soon parted. The ironic part these fools think they are saving money by not getting professional help.

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The ironic part these fools think they are saving money by not getting professional help.

Absolutely.

A friends widow transferred the farm to her nephew because she was afraid of not certain. He sold the property. She ended up freezing her buns in a mobile home because she couldn’t afford heat.

Few years ago, someone quick claim a lot to me due to she owed me money and pay me with a lot instead money. I sold the lot this year, next year in my income tax, how can I calculate the profit/lost?

I don’t know your business, so maybe it makes sense to accept payment in the form of land rather than cash. But when someone wants to do that to me–let me pay you with something valuable instead of cash, let me sign over something worth more than I owe you and you can give me the difference in cash, etc.–I say “I don’t want to become your bank, real estate agent, lending institution or whatever.” Now you’re obligated to learn a bunch of tax information you otherwise wouldn’t be obligated to care about. It may affect your 2021 and 2022 taxes, and depending on the resolution, even 2023.

Again, maybe this makes sense for your situation, especially if you wouldn’t get anything otherwise for whatever reason. But it reminds me of how I tried to avoid fancy footwork that was outside my wheelhouse. With land, I was always worried about it turning out to have been a lot where a company stored its fuel and now needs contaminated soil remediation, or someone finds an endangered species and you can’t affect its habitat so nobody wants to buy your lot since it can’t be used for commercial or residential.

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I don’t know your business, so maybe it makes sense to accept payment in the form of land rather than cash. But when someone wants to do that to me–let me pay you with something valuable instead of cash, let me sign over something worth more than I owe you and you can give me the difference in cash, etc.–I say “I don’t want to become your bank, real estate agent, lending institution or whatever.” Now you’re obligated to learn a bunch of tax information you otherwise wouldn’t be obligated to care about. It may affect your 2021 and 2022 taxes, and depending on the resolution, even 2023.

It sounds like he was paid with the title to the property and probably the only way payment would be made for the debt. The previous owner has no remaining interest in the property and will not receive any payment regardless of the sale price.