Capital Gains Tax on Selling Land: What Property Owners Need to Know
When you sell land for more than you paid, the profit is a capital gain. That gain is often subject to capital gains tax, a federal tax that applies to appreciated assets like real estate. Whether you’re dealing with a small plot, a piece of land, or a large parcel, understanding the tax implications of selling land is essential for minimizing your tax bill.
What Is a Capital Gain?
A capital gain is the difference between your sale price (minus closing costs) and your cost basis (what you paid for the land, plus improvements and certain fees). If you sell land for less than your cost basis, that’s a capital loss.
Capital gains are classified as:
Short-term (held for 1 year or less): Taxed as ordinary income at your regular income tax rate.
Long-term (held more than 1 year): Taxed at lower long-term capital gains rates.
Note: The IRS calculates the holding period starting the day after you acquired the property and ending on the date you sold it. If you owned the land less than one year, it’s considered a short-term gain and taxed accordingly.
Keep records of your original purchase documents, improvements, and closing costs to support your cost basis if questioned by the IRS.
Capital Gains Tax Rates for Land Sales
As of 2025, the long-term capital gains tax rates are:
| Filing Status | 0% Rate | 15% Rate | 20% Rate |
|---|---|---|---|
| Single | Up to $48,350 | $48,351 to $533,400 | Over $533,400 |
| Married Filing Jointly | Up to $96,700 | $96,701 to $600,050 | Over $600,050 |
| Head of Household | Up to $64,750 | $64,751 to $566,700 | Over $566,700 |
Short-term capital gains are taxed at ordinary income tax rates, which may be taxed at higher rates than long-term gains. If you’re unsure which category applies, speak with a tax advisor about whether your land is considered a short- or long-term asset.
Additional Taxes That May Apply
Net Investment Income Tax (NIIT)
If your modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly), you may owe an additional 3.8% net investment income tax on your capital gains.
State Income Taxes
Most states also tax capital gains as income, with rates varying by state. Some states, like Texas and Florida, have no state income tax.
Some states, such as Iowa, offer exemptions for land used in agriculture or held for long periods. Review your state income tax returns to determine if you’re taxed at lower rates.
Section 1031 Tax-Deferred Exchange
Reinvest proceeds from the sale into a “like-kind” property through a Section 1031 tax-deferred exchange. Requirements:
Identify new property within 45 days
Complete purchase within 180 days
Use a qualified intermediary
This approach helps if you want to push the sale date or sale date into the future to defer capital gains. It’s often used when a big tax bill would otherwise apply.
Installment Sale
Sell the land over multiple years and receive payments over time. You pay tax only on the gain recognized each year. This can reduce your taxable income and potentially lower your tax rate.
Installment sales are helpful when spreading amount of taxes over multiple years.
Offset Gains with Capital Losses
If you’ve sold other assets at a loss, you can use those capital losses to reduce your capital gains.
You can deduct up to $3,000 of losses against regular income per year and carry over unused losses to future years.
Donate Land to Charity
You can donate appreciated land to a qualified charitable organization. This avoids capital gains tax and provides a charitable deduction.
Donating land to charity is one of the few ways to completely avoid paying taxes on appreciation.
Leave the Land to Heirs
Your heirs receive a step-up in basis to the fair market value at the time of your death, which can significantly reduce or eliminate capital gains tax upon sale.
Inherited land gets a full step-up in basis, erasing any gains accrued during your lifetime if sold shortly after inheritance.
Section 121 Personal Residence Exclusion
If the land includes your primary residence, you may exclude up to $250,000 ($500,000 for married couples) of gain if you’ve owned and lived on the property for 2 of the last 5 years.
If you owned the property and used it as a home, you may qualify for this significant exclusion.
Gifting Land to Others
Gifting land transfers your original cost basis to the recipient, deferring tax to them upon resale. This can shift the tax burden but doesn’t eliminate it.
Note: If you transfer land as a gift, the recipient assumes your basis and holding period.
How to Calculate Your Capital Gains on a Land Sale
Determine Sale Price: Subtract selling costs like realtor fees and closing costs.
Calculate Cost Basis: Add original purchase price, improvements, and qualifying expenses.
Subtract Cost Basis from Sale Price: This is your capital gain (or loss).
Make sure you include all costs related to improvements onto the land to avoid overpaying.
Deductions to Reduce Your Gain
Cost of grading, clearing, or utility installation
Title insurance and closing costs
Legal, appraisal, and survey fees
If your land includes depreciated structures (e.g., barns or buildings), depreciation recapture rules may apply—those gains are taxed at higher rates.
When Is Selling Land Considered Ordinary Income?
If you frequently sell real estate or subdivide lots, the IRS may classify the profit as ordinary income, subjecting it to self-employment tax and higher rates.
If you are actively developing or marketing land for more than one sale, you may be considered a dealer and taxed at regular income rates.
Estimated Taxes and IRS Reporting
If you expect to owe a significant amount of capital gains tax, you may be required to make estimated tax payments to avoid penalties.
Report your sale on Form 8949 and Schedule D. Improper documentation or overstated basis values are common audit triggers.
Understanding your tax rules and tax obligations is key to minimizing errors.
If the land is owned through an LLC or trust, consult a tax advisor—entity structure can affect how gains are reported and taxed.
Special Use Cases: Business or Agricultural Land
Land used in a trade or business—like farming—may qualify for Section 1231 treatment, potentially offering favorable tax treatment compared to typical capital gains.
Avoid Paying Capital Gains Taxes
Common strategies include 1031 exchanges, charitable donations, gifting to heirs, and step-up in basis. Each has specific IRS rules and timelines.
These methods may help you defer capital gains and reduce your tax in the long term.
Use a Capital Gains Tax Calculator
Several online tools can help estimate your tax bill based on sale price, basis, filing status, and income. These calculators help assess tax liability and plan around your gross income.
Tax Strategy for Land Sellers
Defer gains with 1031 exchanges or installment sales
Avoid gains with donations or stepped-up basis
Offset gains with losses
Consult a qualified tax professional for personalized advice
Taxes on a Land Sale
Capital gains are triggered by the difference between sale price and basis. Federal, state, and investment income taxes may apply. Keep records and consider all available strategies.
Make sure to understand your federal and state income tax responsibilities in full.
Sell Your Land with a Plan
Whether you’re motivated by timing, taxes, or retirement, plan ahead to minimize capital gains taxes on the land sale. With the right strategies, you can reduce or defer what you owe.
If you’re looking to sell your land but concerned about taxes when selling, professional guidance can save thousands.
Federal Capital Considerations
Understand the federal tax brackets, investment thresholds, and how gains are treated relative to income and asset class.
Final Thoughts
With strategies like a 1031 exchange, installment sale, and tax-loss harvesting, you can preserve more profit from your land sale.
Always consult a qualified tax professional to tailor your approach.