Sale of part of back yard (income tax question)

[Gordon Burditt]

A neighbor has proposed to me that I sell her a portion of my back
yard. (Yes, I live there and will continue to live there after the
sale). She has a pool and wants more space around it. I'm tired
of mowing it and don't really have a use for it. At first glance,
it seems like a win-win deal.

This would be selling about 20% of my lot and 0% of the house (rough
eyeball calculation: no surveys have been done yet, and I haven't
figured out how much one costs. There is an existing fence with
my property on both sides that the previous owners used to divide
the area where their dog ran from their garden, and that roughly
corresponds with the proposed boundary. The neighbor will have to
build a higher fence anyway (because of the pool and safety rules).

How would I calculate the gain or loss for income tax purposes on
that piece of land? Land values have gone up since I bought it,
so it's probably a gain. I know how much tax basis I have in the
house+land, but not in the land alone.

Is it reasonable to assume that if I sell 20% of my land (by area),
that represents 20% of the tax basis of the land alone? I'm pretty
sure the answer to this is NO. The value of real estate is based
on location, location, location, and I think that's true even for
different parts of the same lot. I've only got 3 potential buyers
for that back piece of land that doesn't involve creating an isolated
piece of land that can't be reached without going through someone
else's land (I'm sure there are rules against this, besides no
potential buyers being that stupid), and only one has shown interest.
Even if 20% by area = 20% of tax basis of land is reasonable, how
do I divide between the house and the land.

Does anyone know of a term for this kind of transaction? Search
engines pull up all sorts of stuff about developers subdividing
large parcels into home-sized lots. That's not what I'm considering
doing here. The IRS has tons of info on "Sale of Your Home" but
none on "Sale of Part of Your Lot". Yes, I should Google it. But
Google what? I'm running out of ideas for what to Google. The IRS
probably has rules on this if only I could find them.

If lawyers and tax accountants have to get involved, their fees
will probably eat up more than the proceeds of the sale (20% of the
appraised value of the land = about $4,000, and I'll be lucky to
get over half that, less costs of a survey, recording fees, and who
knows what else).

[Gordon Burditt]

>> A neighbor has proposed to me that I sell her a portion of my back
>> yard. (Yes, I live there and will continue to live there after the
>> sale). She has a pool and wants more space around it. I'm tired
>> of mowing it and don't really have a use for it. At first glance,
>> it seems like a win-win deal.
>>
>> This would be selling about 20% of my lot and 0% of the house (rough
>> eyeball calculation: no surveys have been done yet, and I haven't
>> figured out how much one costs. There is an existing fence with
>> my property on both sides that the previous owners used to divide
>> the area where their dog ran from their garden, and that roughly
>> corresponds with the proposed boundary. The neighbor will have to
>> build a higher fence anyway (because of the pool and safety rules).
>>
>> How would I calculate the gain or loss for income tax purposes on
>> that piece of land? Land values have gone up since I bought it,
>> so it's probably a gain. I know how much tax basis I have in the
>> house+land, but not in the land alone.

> For the land vs. improvement split, what does your property tax bill say?
> In some places, most of the value is in the structure, while for example,
> here in California, the land itself may be worth more. Unless you built
> your house, that's what most people use and the IRS accepts it.

I didn't build it, I bought it already built. If I did build it,
I'd know the separate basis of the land and house, right? They'd
be on separate bills.

Thanks. I presume you mean I should dig up the 1978 tax bill (when
I bought it or the first one afterwards, and I can probably still
find it) and apply the land:improvement ratio on the tax bill as
close to the time of purchase as I can get to split up my basis.
The *current* land:improvement ratio is probably irrelevant unless
I'm looking for guidelines for an asking price.

Lots of cities/counties deliberately do assessments at some ratio
to full market value for some silly reason I've never understood
(market value: $100k, assessed value: $50k, tax rate: 4% of assessed
value, so I pay $2k in taxes. Why the heck not market value: $100k,
assessed value: $100k, tax rate: 2% of assessed value, so I pay $2k
in taxes? They get the same taxes either way. It sounds like
deliberate obfuscation on the part of the taxing authorities.), so
the chances of assessed value matching the actual selling price
exactly is about the chance of an untaxed snowball in Hell.

I suppose if they believe that argument, they'll also believe: it's
20% of the land by area, so it's 20% of the basis of the land. And
that solves the problem.