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The Spokesman-Review Newspaper
Spokane, Washington  Est. May 19, 1883

Tom Kelly: Keeping the peace when dividing your getaway property

If you want to slice off a piece of your second-home property for the kids or sell a section to a long-time neighbor, keep the big hammer in the back of the truck and keep it hidden until you really need it.

The keys to potential success – and keeping your peaceful getaway peaceful – are understanding what you originally purchased, staying current on ever-changing land-use legislation and communicating civilly, politely, respectfully and amicably with neighbors and local county decision-makers. The “how” can absolutely be as valuable as the “when.”

For example, let’s say your 5-acre waterfront cabin retreat has been rezoned so that 2.5-acre parcels now qualify for a building site. You sell your home in the city and move into the cabin and use it as your primary residence. You may not wish to divide your property, but it usually makes sense to research what is possible. That way, if you decide at some future date to sell all or part of the parcel, you can show the potential buyer that your property is/can be two separate and independent pieces of property.

Remember that local zoning ordinances can change faster than federal tax guidelines. What is dividable or adjustable today may not work tomorrow and for a variety of reasons, ranging from too much or too little water, endangered species and basic lot size.

For example, under an old California law, landowners could use old records suggesting their property had been subdivided differently at one time and use those records to force a jurisdiction to issue a certificate of compliance. This loophole in the law, according to the state, “has enabled speculators to reap excessive profits on properties financed in large part through state parks bonds and federal funds.”

Even though a new proposal makes it nearly impossible for property owners to make lot line adjustments that are necessary for them to sell, lease or obtain a mortgage on the property, the bill was passed into law. If you do choose to divide, and are successful in the subdivision process, you could easily find that the market value of your 2.5-acre second lot far surpasses what you originally paid for the entire five acres.

So, you did decide to sell your extra 2.5-acre lot, what would be the best way of maximizing your profit? Once you subdivide your property, the portion without the house on it can no longer be considered part of your principal residence. Hence, it will be subject to capital gains tax, probably at approximately 20 percent.

The profit on the newly created 2.5-acre parcel would be the sales price less the cost. Your cost of the new lot would include all the subdivision expenses involved to create it. Plus, you have to calculate what portion of the cost of the original five acres you have allotted to the new 2.5-acre piece. That number will be your cost basis.

The amount you allocate to the new parcel of land, however, does not have to be equal to the value given to the other 2.5-acre piece. If the new parcel has a far superior beach, better waterfront access, a more sweeping view of the water and mountains, the new parcel could be worth far more than its partner with the rundown cabin. In fact, you will want the basis of the new property to be as high as possible so that you can offset the proceeds from the sale.

Remember, because you created a separate tax parcel, the new piece is no longer included in your primary residence exclusion. If Uncle Sam challenges you at tax time, you will need to show how you arrived at the cost basis for the new parcel. In this case, maximizing your cost reduces your tax exposure. The eventual sale of the 2.5 acres with cabin would be tax-free (up to $500,000 for a couple, $250,000 for a single person) because it qualifies as your primary residence.

In many popular rural areas, buildable land has become so scarce that both big-time developers and small builders are hiring real estate professionals to scout potential sites for them. Older subdivisions – those that were platted decades ago but have remained untouched – often have dodged most growth management limitations for building. These sites have been “grandfathered” into the previously relaxed development codes.

Owners with land in these areas may be presently surprised to discover that their property fits the criteria for subdividing when other parcels in the immediate area do not. And, if your lot has been on the books long enough and the local zoning allows for additional units, then it might be possible to divide it even if there are environmental concerns.

Sometimes environmental guidelines restrict the placement of future dwellings but not the number. Homes can often be “clustered” away from a sensitive area without curtailing the number of structures. Always check your options.