Summary:
If the home sale is tax-exempt, the land next to it might also be.

If the sale of your home is tax-free, the adjacent land is also tax-free if it's used as part of the home. What does that mean?

Say your home, on one acre of land, had the yard filled with swings and toys for your children. Clearly, the acre of land was part of the home.

But can 432 acres qualify? James D. Schlicher thought it could. His case illustrates the rule.

Schlicher's prior home was on 5 acres. He moved because neighboring children climbed the fence to get close to his horses and neighbors threw cat litter over the fence.

He bought 51 acres of undeveloped land in Clayton, Calif., and fenced off 72 acres for his horse boarding and breeding business. Schlicher never allowed riding lessons or other business-related activities on the 43 2 acres. The nature lover appreciated living in open spaces where he could hike and ride horseback. He and his girlfriend enjoyed the unobstructed view of the countryside and Mount Diablo.

The IRS argued that the steeply-hilled wooded area didn't qualify because his use was insignificant.

The court disagreed and said the law doesn't require significant use. The use of the 432 acres qualified it as part of the home. Schlicher enjoyed solitude and testified this was a place where he could live the rest of his life, untroubled by close neighbors.

More at Planning,Other