What will our capital gains tax be on $1.5-million land sale?

Q. I bought 12 acres of land 10 years ago for $83,000, built a house on a small part of that and have lived there for nine years. We are in the process of subdividing the land into 57 lots to sell. However, we have just been approached and offered $1.5 million for our land, excluding our house. Payment will be in 12 monthly installments. How much will we be looking at paying in capital gains tax?

A. We took your question to Clint Costa, an attorney and CPA at the Chicago law firm of Shaheen, Novoselsky, Staat, Filipowski & Eccleston. Here's what he says.

The capital gain would be calculated as the selling price minus the $83,000 original purchase price plus any capital improvements made to the land.

Obviously, maintaining the landscaping would not be considered a capital improvement, but perhaps installing a major drainage system and retention area could be.

Since the land has been held for 10 years, the gain would be long-term.

If the $1.5 million purchase price was payable over a period of multiple years, the questioner could elect to recognize a portion of the gain each year under the "installment method" or could recognize all of the gain in the year of sale.

However, in this case, since the purchase price is payable over a period of months, it would seem that the entire gain would be recognized in the year of sale.

This assumes that the sale will indeed fall under capital gains.

If you have actually subdivided the land for sale as individual parcels, you may have converted it from a capital asset to inventory.

In that case, the sale would be taxed as ordinary income rather than capital gains.

This is a big sale. You need to have a local CPA or a tax attorney review all the specifics to determine how the sale should be taxed and what your liability will be.