Article Date:
December 2009

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Use Safe Harbor to Lock In Capital Gains When You Subdivide Land

Do you want to subdivide some land and also save on your taxes? Would you like to do this in an IRS-approved way? You can!


But this takes some planning. Without planning, you could easily subdivide and sell that land as a real estate “dealer” where the lots would be inventory and the profits taxed at regular tax rates of up to 35 percent.


The planning laid out in this article shows you how to use the safe-harbor provisions of Section 1237 to pay taxes on your subdivided land profits at long-term capital gains rates of up to 15 percent. That’s a whole lot better than 35 percent.


How You Pocket Cash


Say you subdivide land and sell it for a profit of $1 million. If the law treats you as a real estate dealer, your tax is $350,000 (35 percent times $1 million).


With the Section 1237 safe-harbor plan, your federal income tax drops to $150,000 (15 percent maximum capital gains rate times $1 million).


Thus, knowledge and use of Section 1237 saves $200,000.


Now that we have your attention, let’s take a look at how you put Section 1237 to work for you.


How You Qualify


To qualify for tax-favored Section 1237 treatment, you must pass the seven ... Log in to view full article.

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