Will my friend have to pay a capital gains tax when he sells a tract of land?
Q. I have a friend who owns a tract of land free and clear. He has been offered $75,000 for it and would like to use the money to buy a house. Will he have to pay a capital gains tax on it?
A. We took your question to a tax accountant who said that your friend likely would have to pay a capital gains tax. The amount would be calculated based on the difference between what he paid for the land and what he sells it for, or, if he inherited the property, on the difference between what the land was worth when he inherited it and what he sells it for.
In either case, the tax likely would be 15% on the gain -- that is, on the difference between the original price and the selling price.
However, we would urge him to hire a tax accountant to advise him on this issue and prepare his 2008 federal taxes. That's the best way for him to make sure he meets all IRS rules and gets the most favorable tax rate. This is a big enough sale to warrant the expense.