Long Or Short Term Capital Gain?
A couple of years ago I started buying Tax Liens in Colorado. In a simplified nutshell the process is that you purchase a lien at auction and pay subsequent years taxes until the certificate is at least 3 years old. At that point you file for title and if the owner still fails to pay the taxes the treasurer issues you a deed. I have purchased about 60 liens since 2005 so I’ll probably wind up owning a couple.
My question deals with determining the capital gains when I sell the property. When does the holding period start? Would it be the date of the original certificate, the date I file for title or the date title is granted?
New Kid,
I understand your logic. Obviously I’d like a different answer since this is the worst possible answer from a tax point. It means that I have to hold property for a year after receiving title, or pay the higher tax. This just doesn’t seem to follow the spirit of the tax break for long term gains. The earliest I can gain title to the liens I purchased in 2005 would be early to mid 2009. This means that investments that gain after 4.5 years would be subject to the short term tax rate.
Another application of a similar principal is a Contract for Deed more commonly known as a Land Contract. For the purpose of the holding time does the seller’s holding time extend to the end of the contract? If so, this is a way to sell properties gained through lien and legally avoid the higher tax rate. Another way might be to lease the property with an option to buy after a year.
I should mention that I started buying tax liens in November 2005 and currently own 43 liens in 3 different counties in Colorado. I will probably post a modest profit in interest for 2007, but with interest accruing at the rate of $400+ each month the tax implications are increasing.
Thanks
Erik
The county actually issues a deed to the property, complete with Title insurance (at my expense). If the owner redeems the back taxes they do pay all taxes, interest and fees associated with the tax lien. I lose my premium bid. It’s interesting that after just 1 year in some counties I’m already in the black on paper 7 in others I’m still in the red after more than 2.
In lieu of a better answer I was planning on handing this the same as stock with different purchase dates. I would essentially have 3 dates, the initial auction and 2 years of additional taxes. By the time I have title the original auction and the next year would already be more than a year old and therefore long term. The last year of taxes would be only a few month and short term if I flip the property in short order. Rough math would then be that 1 third of the profit would be subject to short term capital gains taxes and 2 thirds to long term. I think I’m on firm ground if I treat redeemed properties the same. The principal I’m going on is the length of time the money is invested.
I intend to ask the IRS this question so that I have a written answer, but I want to be informed before I write them.
Thanks
Erik
By better I meant better than my own potential solution of handling it like stock in a single company purchased on multiple dates, but sold at one time. I have had cases like this where a portion of my profit is subject to short term gain tax & the rest to long term.
My military background does cause me to lean to the more authoritative answer, backed up by written references. It’s amazing how answers change when you politely ask for a written response in addition to the verbal.
Your answers will definitely help me form my question to the IRS in a manner that might generate an intelligent and accurate answer. It just seems that gains on money invested for more than 4 years should be considered long term gains. I’m afraid that I’ll have to wait until this scenario actually becomes a reality so that I can add firm dates and dollar figures to my question.
Thanks again
Erik
can part of the gain be booked to the holding period of the lein, and invest in other leins?
I agree with the both the opinion that you only owe a lot of taxes if you’re making a lot of money, and the opinion that you should reduce the taxes as much as you legally can. I have no interest in owning rental properties as it simply does not fit our lifestyle. Currently we spend 3-4 months each winter in Mexico and hope to extend that to almost 6. We have purchased liens on a variety of property, but concentrate on vacant land. Since vacant mountain land just doesn’t sell when it’s under snow there isn’t any real market until late April or early May. Real Estate and tax lien investing suits us fairly well since the Colorado auctions are in October & November and I don’t need to be available to show properties I own in the winter.
Erik
When I was a kid I spent a summer with my grandmother in her cabin a couple miles north of Black Hawk. We had a mini blizzard on the fourth of July. So yes, summer is short up there...
Interestingly I also spent many of my winters as a child in Mexico. So I certainly understand the logic of your lifestyle!
Chris
[quote]
Get married, have children, pay mortgage interest on your own home and even a second home.
Getting Married & having children to save on taxes seems like buying a 747 for the free penuts!