I sold a piece of undeveloped land, but the buyer had a condition that I remove (and dispose of) a derelict coach/trailer we parked there long ago. Does the cleanup done only so we can sell count as a selling expense or otherwise after the basis?
-Wayne, CA
Dear Wayne,
Congratulations on the sale of your undeveloped land! As part of the sale, you agreed to remove and dispose of a derelict trailer you parked on the property some years before, and hope you can take this cost as a selling expense or other tax benefit. I commend you for your excellent question and for considering ways to ensure you pay no more tax than what is rightfully owed.
Although you did not mention if the coach/trailer or undeveloped land was connected to a trade or business, for now, I am going to assume that the trailer was your personal property and not used in a trade or business. Generally, certain costs that a seller incurs when disposing of property, whether that property is vacant land, or a home and the land it is on, are deductible in the year the property is sold. To be deductible, the selling expenses must be needed to facilitate the sale of the property, not personal in nature, and paid by the seller. These deductible expenses help to reduce the amount of any gain realized on the sale. If there is already a loss on the sale before the selling expenses are taken into account, then the selling expenses will increase the loss. Examples of deductible selling expenses include sales commissions, legal fees, recording fees, appraisal fees, abstract of title fees, and transfer or stamp taxes. Any selling expenses paid by the buyer are added to the sales price and may increase the gain or reduce the loss the seller realizes. Any expenses incurred when selling property that are personal in nature are generally not deductible. Whether the expenses are considered personal is a matter of facts and circumstances.
It is human nature to collect stuff. Whether it is stuff we use daily or hurriedly display whenever great-aunt Marge pays a surprise visit (let’s hear it for crocheted cup cozies!), we make it, receive it, collect it, and keep it in perpetuity. Apart from the spaces belonging to devoted minimalists, empty spaces, whether nestled in the southeast corner of a living room or plot of vacant land, thingamajigs, doodads, or whatchamacallits, are bound to appear. Let’s face it, even Mother Nature adorns wide open spaces with trees, flowers, and bushes if the conditions are right. But what do we do with all this stuff when it is no longer needed or when we decide to sell the underlying property holding our junk and treasures? Can the expenses associated with hauling away items to facilitate the sale of land be deductible? Alas, when personal-use property is moved to and then stored on a vacant lot and eventually needs to be removed because the land is being sold, the expenses associated with hauling and disposing of the personal-use property are not includable as a selling expense. Even though clearing away the coach/trailer was part of the agreement when you sold the property, the trailer was not part of the vacant land when you first obtained it (whether that was via purchase, inheritance, gift, etc.) and we are assuming the trailer was used for personal purposes and not connected to a trade or business.
Consider the selling expenses that are deductible when selling a home. Throughout the years, homeowners tend to acquire belongings of every persuasion – clothes no longer in style, old furniture, and a small mountain of outdated electronics, computers, and other e-waste that cannot be disposed of in the general trash. These items fill up every inch of the garage, basement, attic, and even the storage space under the stairs. Unless the home sale agreement specifically states that certain items in the home are included in the sale, it is understood that the seller, at their own expense, will move or otherwise dispose of any personal items within the home at the time of sale, before the new owners take residence. Generally, the costs of moving or disposing of these items are considered personal expenses and are not deductible as a selling expense, even though removing the items are required.
If the trailer was an asset of a business at the time it was disposed of, then it is possible the expenses for disposing of the property may be deductible as a business expense. However, that would depend on the particular facts and circumstances, and if this is the case, we recommend seeking the guidance of a tax professional so you can discuss the situation in detail.
Wishing you success in all your real estate ventures and many happy returns.
Jean Lee Scherkey, EA