Does reinvesting money obtained from sold land exempt me from income tax liability?

by William B. McAllister, CPA | Aug 23, 2019

I sold land in North Carolina for $75,000. I do not want this $75,000 added to my income tax for the year, so I plan to invest it in the purchase of land in Maryland. Will reinvesting the $75,000 prevent this amount from being added to my income tax bill? Also, is this referred to as a 1031 exchange? 

The land sold in North Carolina for $75,000 was acquired by purchase, gift, or inheritance; therefore, it has some determinable basis to establish the appropriate gain to report for income tax purposes. You must also establish the proper holding period to determine whether the gain is short-term or long-term capital gain.
The attempt to avoid tax may not be as beneficial as you may assume. Capital gains rates are as low as zero and do not exceed 25% if alternative maximum tax is required to be imposed. In this case, the circumstances do not qualify this transaction for a 1031 exchange.
Generally speaking, the concept of reinvesting in a like-kind asset does not provide exemption from federal or state income tax. State laws, however, don't always follow federal laws.
Tax law is complicated and there are many exceptions to the various rules depending on the nature of the transaction and the type of activities conducted by the taxpayer. So numerous factors must be weighed to establish the tax obligation in your specific circumstance. Be sure to contact your local CPA to understand how the rules affect you.

For more resources, check out PICPA’s Money & Life Tips, Ask a CPA, or CPA Locator.

Answered by: William B. McAllister, CPA, is the owner of W.B.M. Tax Preparation & Accounting Services in Honesdale, Pa.

The responses are based on the limited information provided by the questioner and apply the laws and regulations at the time of posting. Other options could arise as rules and regulations may change over time, including but not limited to the passage of the Tax Cuts and Jobs Act of 2017. They are intended to provide general information, not specific accounting or tax advice; they are not intended or written to be used and cannot be used for the purpose of avoiding or evading taxes or penalties under the IRS code or regulations. Views expressed do not imply an opinion of the PICPA, its officers, directors, employees, or members.
Financial FAQs

Search the most frequently asked finance and accounting questions and read the responses from PICPA members. Always consult a CPA before taking action.