!Capital gains tax exclusion for adjoining vacant land

One of the great benefits of being a homeowner is the $250,000/$500,000 exclusion from capital gains tax, which is a form of income that's collected based on the rise in an asset's value and the resulting profits. This tax exclusion (from Section 121 of the Internal Revenue Code) permits homeowners to subtract from their taxable profits $250,000 of the amount earned from selling their home if they are single, and $500,000 if they are married and file jointly. To qualify, all you have to do is live in the home any two out of the five years before the sale, and not have sold another main home within two years and claimed the exclusion.

This tax exclusion applies to the sale of your main home, which includes the building or buildings that constitute your home and the surrounding land. But what if you own vacant land around your home that you decide to sell separately from the home itself, perhaps to raise needed cash without selling your entire property? Can it qualify for the exclusion? It's possible if you can meet certain conditions as discussed below.

In This Article

When Vacant Land Can Come Under the Capital Gains Tax Exclusion for Real Estate

Vacant land can qualify for the real estate capital gains tax exclusion, provided that:

  • The vacant land is adjacent to land containing your home. The land must be physically adjacent to the parcel on which your dwelling unit sits. The law doesn't specify a maximum acreage limit, but at a certain point, it might be difficult to claim a particularly large swath as "adjacent."
  • The sale of the vacant land and the sale of your home occur within two years of each other. Whether you sell the land first or the home first, the two sales must happen within a two-year window.
  • You owned and used the vacant land as part of your main home. You must have treated the vacant land as part of your principal residence, not as investment or rental property.
  • Your use of the vacant land satisfies the two-year ownership and use rule. The same must be true of the sale of your main home.

If these requirements are met, the sale of the home and the sale of the vacant land are treated as one sale and one $250,000/$500,000 exclusion can be applied to the combined gain from both sales.

Example: In 2016, Jamie, a single person, buys property containing a house and 10 acres that she uses as her main home. In 2025, she sells the home and two acres, for a $50,000 gain. Jamie qualifies for the $250,000 home sale exclusion, so this gain is not taxable. In 2026, Jamie sells her remaining 8 acres, for a $100,000 gain. Because this land satisfies the 2-year ownership and use rule, its sale and the sale of the home are treated as a single sale for purposes of the $250,000 exclusion. Thus, Jamie need not pay any capital gains tax on her $100,000 gain, which is fully excluded.

What If You Sell the Vacant Land First?

If you sell vacant land before you sell the home it surrounds, the sale will not qualify for the capital gains tax exclusion at that time. You will need to report the gain from the land sale as taxable income on your tax return for the year of the sale. But, if you sell your main home within two years after you sold the vacant land, the prior sale will come within the exclusion. In this event, you may amend your return for the prior year (using IRS Form 1040-X) and get a tax refund.

Example: Assume that Jamie from the above example sold 8 vacant acres in 2025, and kept her main home. Her $100,000 gain from the sale does not qualify for the $250,000 exclusion in 2025. She must pay income tax on her gain in 2025. In 2026, Jamie sells her main home and remaining two acres for a $50,000 gain. The prior sale is now treated as part of the sale of the main home and qualifies for the exclusion. Jamie can file an amended tax return for 2025 in which she excludes her $100,000 gain from her income, resulting in a nice tax refund.

For More Information

For more on relevant tax issues, see IRS Publication 523, Selling Your Home. This publication includes detailed worksheets to help you calculate your exclusion, determine your gain or loss, and figure how much of any gain from the property sale is taxable.

And for a professional assessment of your options, talk to a CPA or other tax professional. A pro can help you look into other ways to reduce your capital gains tax hit, such as a 1031 exchange, installment sale, contribution to charity, or timing strategies to maximize your exclusion.