Capital Gains Tax on Land Sale: Rates, Exchanges, and Installments

The capital gains tax on a land sale is figured by subtracting your adjusted cost basis from the net sale proceeds and then applying a federal rate that depends on how long you owned the property and your total income for the year. Land held longer than one year is taxed at 0%, 15%, or 20% at the federal level, with a possible 3.8% surtax on top. Land held one year or less is taxed at ordinary income rates, which run as high as 37%.¹ State tax usually applies on top, and inherited or gifted land follows special basis rules that change the math significantly.

Calculating Your Gain

The gain is a two-step subtraction. First, work out your adjusted cost basis. That starts with the original purchase price and closing costs at acquisition: title insurance, survey fees, transfer taxes, and recording fees.² Certain later expenditures increase basis, including local improvement assessments for paving, ditches, or utility line extensions; impact fees and zoning costs; legal fees to defend or perfect title; and capital improvements like grading, drainage, or fencing.

Basis also gets reduced by things like casualty losses you claimed during ownership, insurance reimbursements, payments received for granting an easement, and excluded energy conservation subsidies.² Keep the receipts. The IRS can ask you to prove any of these numbers, and the burden is on you.

Second, work out your net sale proceeds. Take the gross sale price and subtract selling expenses: broker commissions, title company fees, attorney fees, and transfer taxes paid at closing. Subtract your adjusted cost basis from that net number. What remains is your realized capital gain.

Federal Rates for 2026

The holding period starts the day after you acquired the land and runs through the day you sell. One year or less is short-term, taxed as ordinary income at rates from 10% up to 37% for 2026.³ More than one year is long-term, taxed at 0%, 15%, or 20%.¹

Which long-term rate applies depends on your total taxable income. For 2026, the thresholds are:⁴

0% rate: taxable income up to $49,450 single, $98,900 married filing jointly, $66,200 head of household, or $49,450 married filing separately
15% rate: income above those amounts up to $545,500 single, $613,700 married filing jointly, $579,600 head of household, or $306,850 married filing separately
20% rate: taxable income above the 15% ceiling

A common mistake is thinking the brackets apply only to the gain. They apply to your total taxable income, which includes the gain. A large land sale can push part of your income across a threshold, and only the portion above the threshold is taxed at the higher rate.

The 3.8% Net Investment Income Tax

Higher earners owe an additional 3.8% surtax on net investment income, and capital gains from a land sale count.⁵ The tax applies to the lesser of your net investment income or the amount your modified adjusted gross income exceeds these thresholds:⁶

Single or head of household: $200,000
Married filing jointly: $250,000
Married filing separately: $125,000

These thresholds are not indexed for inflation, so they catch more sellers each year.⁶ A seller in the 20% bracket who also owes the NIIT pays an effective federal rate of 23.8% on the gain. The surtax is calculated on Form 8960.

Inherited Land

Inherited land generally gets a stepped-up basis equal to the fair market value on the date the prior owner died, regardless of what they originally paid.⁷ If a parent bought land for $20,000 decades ago and it was worth $200,000 at death, your basis is $200,000. Sell it for $210,000 and your gain is $10,000.

When an estate tax return is filed, the executor may elect an alternate valuation date. You may also be required to use a basis consistent with the value reported for federal estate tax purposes, and the IRS can impose an accuracy-related penalty if you claim a higher basis.⁸

Inherited land also gets favorable holding-period treatment. Even if you sell within months of inheriting, the gain is treated as long-term.⁹ The 0%/15%/20% rates apply regardless of how briefly you actually held it.

Gifted Land

Gifted land is more complicated. For calculating a gain, your basis is the donor’s adjusted basis at the time of the gift.¹⁰ If your parent’s basis was $30,000 and you sell for $150,000, your gain is $120,000.

A dual-basis rule kicks in when the land has lost value. If the donor’s basis exceeded the fair market value at the time of the gift, and you later sell at a loss, your basis for calculating that loss is the fair market value at the time of the gift, not the donor’s higher basis. Sell somewhere between the two figures and you recognize neither a gain nor a loss.

Selling at a Loss

Not every land sale produces a gain. If your adjusted cost basis exceeds your net proceeds, you have a capital loss, and whether you can deduct it depends on how you used the land.

Land held for investment produces a deductible loss. You first offset any capital gains for the year. If losses exceed gains, you can deduct up to $3,000 of the net loss against ordinary income, or $1,500 if married filing separately, with any remaining loss carrying forward indefinitely.¹

Land held for personal use produces no deductible loss. The IRS only allows loss deductions on property used in a trade or business or held in a transaction entered into for profit.¹¹ A recreational lot bought for weekend camping and never rented out is personal use, and the loss disappears with no tax benefit.

Deferring the Gain: 1031 Like-Kind Exchange

A Section 1031 exchange lets you defer the entire gain by reinvesting into another piece of investment or business-use real property.¹² “Like-kind” is read broadly for real estate: raw land can be exchanged for an apartment building, a commercial warehouse, or another parcel. Both properties must be U.S. real property, and the land can’t have been held for personal use or held by a dealer for resale.

Two deadlines are strict. You must identify the replacement property within 45 calendar days of the sale and close within 180 calendar days. Miss either and the whole exchange fails, making the full gain immediately taxable. A qualified intermediary must hold the proceeds between closings; if you take receipt of the funds, the deferral is dead.

For full deferral, buy replacement property of equal or greater value, reinvest all net equity, and take on equal or greater debt. Any cash or non-like-kind property you receive is “boot” and is taxable up to the amount of your gain. Debt relief counts as boot too, so if your old property had a $100,000 mortgage and the replacement has a $70,000 mortgage, the $30,000 difference is taxable.

Deferral is not elimination. Your original basis carries over to the replacement, and the deferred gain comes due when you eventually sell in a taxable transaction. Some investors chain exchanges for decades, and heirs may receive a stepped-up basis at death.

Spreading the Gain: Installment Sale

An installment sale spreads gain recognition across multiple tax years. It applies automatically whenever at least one payment is received after the close of the tax year of sale, unless you elect out.¹³

To compute it, divide your total gain by the contract price to get a gross profit percentage. Multiply each principal payment you receive by that percentage. That’s the capital gain reported that year; the rest of each payment is a tax-free return of basis. Interest on the outstanding balance is taxed separately as ordinary income.

Report the sale on Form 6252 in the year of the sale and in every subsequent year you receive a payment.¹⁴ The main reason to use it is bracket management. A $300,000 gain recognized in one year might push you into the 20% bracket and trigger the NIIT; spread over ten years, the annual gain might stay in the 15% bracket. You can elect out on your return for the year of sale, but revoking that election later requires IRS consent.

When Capital Gains Rates Don’t Apply

Everything above assumes the land is a capital asset. It isn’t if the IRS considers you a dealer rather than an investor. Property held primarily for sale to customers in the ordinary course of a trade or business is expressly excluded from the definition of a capital asset.¹⁵

Dealer gains are taxed as ordinary income at rates up to 37%, with no access to the preferential long-term rates. Dealer property is also ineligible for a 1031 exchange, and dealer dispositions can’t use the installment method.¹³ Dealer gain may also be subject to self-employment tax. Someone who buys a single parcel, holds it for years, and sells it once is almost certainly an investor. Someone who routinely acquires parcels, subdivides them, and actively markets lots looks like a dealer. If you’re closer to that second description, get tax advice before listing.

State Tax and FIRPTA

Most states tax capital gains from land sales in addition to the federal amount. Some use a flat rate, others fold gains into ordinary income brackets, and a few states impose no income tax at all. Combined state and federal rates can exceed 30% in high-tax jurisdictions.

Gain is generally taxed by the state where the land sits, not where you live. If you live in a no-income-tax state but sell land in a state that taxes gains, you owe that state. Your home state may offer a credit for taxes paid to the source state. Many states also require withholding at closing from non-resident sellers.

If you’re a non-U.S. person selling U.S. real estate, the buyer or the buyer’s agent must generally withhold 15% of the gross sale price at closing under the Foreign Investment in Real Property Tax Act and remit it to the IRS.¹⁶ The withholding is a prepayment against your actual tax liability, and you can file a U.S. return to claim any refund. Reduced withholding is available in some cases by applying with the IRS before closing.

Reporting and Penalties

The settlement agent typically files Form 1099-S with the IRS reporting the gross proceeds and sends you a copy.¹⁷ The IRS knows about the sale before you file.

You report the transaction on Form 8949, listing the acquisition date, sale date, gross proceeds, and adjusted cost basis, with short-term and long-term transactions in separate parts.¹⁸ Totals flow to Schedule D. Installment sales go on Form 6252. NIIT gets computed on Form 8960.

Failing to report the sale or understating the gain carries real cost. The IRS matches 1099-S proceeds against your return, and mismatches generate notices. The accuracy-related penalty is 20% of the underpaid tax attributable to negligence or a substantial understatement of income.¹⁹ On a $50,000 underpayment, that’s another $10,000 in penalty alone, before interest, which accrues on both the tax and the penalty from the original due date. The penalty also applies to overstating basis without documentation, which is why keeping records of every basis addition matters long after the sale closes.

1
Internal Revenue Service. Topic No. 409, Capital Gains and Losses
2
Internal Revenue Service. Publication 551 (12/2025), Basis of Assets
3
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
4
Internal Revenue Service. Rev. Proc. 2025-32
5
Internal Revenue Service. Topic No. 559, Net Investment Income Tax
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Internal Revenue Service. Questions and Answers on the Net Investment Income Tax
7
Office of the Law Revision Counsel. 26 U.S. Code 1014 – Basis of Property Acquired From a Decedent
8
Internal Revenue Service. Gifts and Inheritances
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Office of the Law Revision Counsel. 26 U.S. Code 1223 – Holding Period of Property
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Office of the Law Revision Counsel. 26 U.S. Code 1015 – Basis of Property Acquired by Gifts and Transfers in Trust
11
Internal Revenue Service. Losses (Homes, Stocks, Other Property)
12
Office of the Law Revision Counsel. 26 USC 1031 – Exchange of Real Property Held for Productive Use or Investment
13
Office of the Law Revision Counsel. 26 U.S. Code 453 – Installment Method
14
Internal Revenue Service. About Form 6252, Installment Sale Income
15
Office of the Law Revision Counsel. 26 U.S. Code 1221 – Capital Asset Defined
16
Internal Revenue Service. FIRPTA Withholding
17
Internal Revenue Service. Instructions for Form 1099-S (04/2025)
18
Internal Revenue Service. Instructions for Form 8949 (2025)
19
Internal Revenue Service. Accuracy-Related Penalty