Subdivision Of Land And Capitol Gains
I am in the process of subdividing a piece of property I own. This process takes at least a year. Will the subdivision affect when my start date for determing short term vs long term? Thanks
Why are you subdividing?
I am subdividing to get six building sites for homes this is on a acre and a quarter which is close to town. I have a mobile home on the property which I plan on moving to another piece further out from town. The building sites are expensive close in.
As a general rule, subdividing land is a real estate development activity, an active income business. Ordinary income tax rates apply, regardless of your actual holding period.
Consult your tax professional for specific details.
Once again, if you are subdividing to sell the land, subdividing to build then sell, you are acting as a developer. Your land is not eligible to participate in a 1031 exchange.
Are you going to put the homes on the properties or are you intending to sell to someone else who will? If you can put the homes on yourself, there may be some possibilities. If not and you need money to live on you might look at setting up a C-corp and pay yourselves salaries out of the C-corp which is deductible to the C-corp. The tax rate for corporations is less that for individuals so distributing salaries in appropriate amounts might save taxes overall. Obviously, you should run this one by someone with considerable tax expertise to see what may be possible.
You may be able to take advantage of the fact that corporations take in revenue, spend money and are taxed on what is left over, whereas, individuals earn money, are taxed, and get to spend what is left over.
Just some thoughts...
Regards,
Ed[ Edited by edmeyer on Date 09/20/2005 ]
The issue is that for development, the properties are not capital assets,but rather inventory for your development business. If they were rental properties then they have the role of capital assets for your rental business. This is why I asked if you would be the one putting homes on the lots. Under this scenario your C-corp could do the development, you or your LLC could buy the homes from the C-corp, put renters in for a time and then exchange using a 1031 tax deferred exchange. Again, run this by your tax consultants.
never heard of it...your buddy better get back to studying his tax books
I think he is confusing some other law. Thanks for the reply. I have never heard of it either.
It may be true if you own more than two homes for personal use. There is the "second home" mortgage write-off.
For investment properties there is no limit since the interest is part of the cost of doing business regardless of how many properties you own.
edmeyer,
Thanks. That sounds more like it. I own more than two investment properties, but not primary homes.
Your friend is specifically referring to the Home Mortgage Interest Deduction on Schedule A. This deduction is limited to the mortgage interest paid for a first and second home.
Mortgage interest paid on investment property (such as vacant land) can also be taken on Schedule A -- as investment interest, not home mortgage interest -- but is subject to limitations.
The mortgage interest you pay for your investment rentals is expensed on Schedule E without any restriction on the number of rental properties that can be in service during the tax year.