7847 / Can gain on the sale of vacant land be excluded from income?
The regulations permit the gain from sales or exchanges of vacant land to be excluded under IRC Section 121 if the following requirements are satisfied: (1) the vacant land must be adjacent to the land containing the taxpayer’s principal residence; (2) the taxpayer must have owned and used the vacant land as part of the taxpayer’s principal residence; (3) the land sale must occur within two years before or after the date of the sale of the residence; and (4) the statutory requirements must have otherwise been met with respect to the vacant land.1
The sales or exchanges of the residence and the vacant land are treated as one sale or exchange. Therefore, only one maximum limitation amount of $250,000 ($500,000 in the case of certain married taxpayers filing jointly) applies to the combined sales or exchanges of vacant land and the residence.2 For more information on the rules governing sales or exchanges of vacant land, see Treasury Regulations Sections 121-1(b)(3)(ii)(A) (how to apply the maximum limitation amount to sales or exchanges occurring in different taxable years); 1.121-1(b)(3)(ii)(B) (sale or exchange of more than one principal residence in a two-year period); 1.121-1(b)(3)(ii)(C) (sale or exchange of vacant land before residence).
1. Treas. Reg. § 1.121-1(b)(3)(i).