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I will do my best to describe this in as few a words as possible.

Wife and I - inherited 80 acres, built house on 2 acres for cost of about $280,000

80 acres was given to us over a 4 year period as a gift equalling $160,000. (Tax exempted because $20,000 given to spouse and $20,000 given to me each year - $40,000 per year for 4 years)

First question...did you INHERIT this land or did you receive it as a GIFT? The difference between these two is paramount to the answer. If you inherited it (that is, you received it upon someone's death), you would use the assessed valuation as of the date of death as your starting cost basis. If, as you seem to indicate, it was received as a gift, your starting cost basis is the cost basis of the person who gave you the gift, not the value on the date your received the gift. This is probably NOT $2000 per acre but an even smaller value.

Question: How to dodge taxes on gains if property sold.

Generally you can't.

New appraised property value: $10,000 / acre -
but given to us at a value of $2,000 / acre
Difference of $8,000 per acre if sold - (We would have to pay taxes on this $8,000 right?)

Wrong. You would have to pay taxes on the difference between $10,000 and the actual cost basis (not the value) of the person who gave you the property.

How can we dodge paying these taxes?

Generally, you can't.

An idea:

Could house be used as a leverage? In other words, if we have lived in the house for 2 years could we sell house along with so many extra acres of land (that could be further subdivided by purchaser) but included in house sell to allow upto $500,000 gain for spouse and me but pay no capital gains? (ps: We don't want to sell our house. Is there a way to do it on paper somehow to dodge taxes, and then get it back in a completely legal manner?

Cost of house will add to your basis in the property. If you sell the entire property (or a portion of the property including the house) you can exclude up to $500K of gain on that portion of the property sold if you've owned and lived in the house for at least 2 years.

Or is there another way to sell the property without selling our house to avoid capital gains?

Stop complaining. If you sell 79 acres at $10K/acre (keeping 1 acre around the house), the most you will be paying in taxes is $118,500 on sales proceeds of $790K. You should be grateful to the person who was so generous in the first place.


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