The proceeds from selling your property do not constitute earnings
because they are not compensation for services you rendered. However,
any gains you realize from selling the property do count as income and
will be taxed as capital gains.
To determine whether you do realize gains from selling the property,
you must subtract its adjusted basis from the sale price. If the result
is positive, you have realized a gain and must pay tax on it. If the
result is negative, you have incurred a loss that you can deduct from
The adjusted basis of the property is its cost basis plus any adjustments
or losses to the property. In the case of land, the cost basis is
essentially the purchase price plus any real estate taxes you paid on
behalf of the seller. If you received the land as a gift or inherited it
rather than purchasing it, the cost basis is the fair market value (FMV)
at the time you received it. If there was no going rate at the time to
help you determine the FMV, you can use the value at which the property
was assessed for purposes of real estate tax. Adjustments to the basis
include insurance proceeds for damage (negative adjustment) and the
cost of any improvements (positive adjustment) but not depreciation,
since personal land property cannot be depreciated.
If the adjusted basis turns out to be greater than $165,000, you have
realized a capital gain. The percentage of tax you must pay on this gain
is the long-term capital gains rate. This rate will be either 5 or 15
percent, but most probably 15 percent, depending on your ordinary income
tax rate. If you pay 10 or 15 percent tax on the rest of your income,
you are liable for 5 percent tax on the capital gain you realized from
selling the property. But if you pay 25 percent or greater tax on the
rest of your income, you must pay 15 percent on the capital gain.
For further information on calculating the adjusted basis of your land,
see Chapter 14 of IRS Publication 17.
IRS: Publication 17
When you file your income tax for the year in which you sell the property,
you will have to complete Schedule D of Form 1040.
IRS: Schedule D
Furthermore, when you calculate your income tax rate, you will have to
complete the tax worksheet on page D-9 of the Schedule D instructions.
IRS: Schedule D Instructions