Tax Treatment Of Pre-Construction Sale
We own two pre-construction condos purchased in 11/04 and 12/04 with construction expected to be completed in the next 18 months. If we hold these for at least 12 months and decide to sell them, would any gain be treated as long-term?
If they are treated as long-term, is there a reference in IRS materials that addresses this?
Thanks,
Bailey
You don't actually own the condos until you go to settlement to purchase them. I am guessing that you have a contract interest in two condos, but don't own them at this point.
The question is whether your contract interest is a capital asset that qualifies for long term capital gains tax treatment, or is it treated as personal property with your sale profits taxed as ordinary income.
I would be interested in the answer to this question, too.
You are right, we do have purchase contracts on both units with agreed upon prices alrighty. We've paid 10% down on both with a letter of credit for another 10% on each unit.
We purchased these units as investment, however, we could end up living in one of them. However, one is sure to be sold either before we hard close or shortly thereafter.
These are residential properties that cannot be rented as vacation rentals. So, their purpose is solely for primary (or secondary) residence or investment property.
So, if I sell one after holding it one year from the date of my purchase contract, are gains considered long-term?
Thanks
Bailey
No. You take title to the property on the day you go to settlement. An acutal holding period greater than one year is required to qualify for long term capital gains tax treatment. A sale after you have been on title for one year will qualify for long term capital gains tax treatment. A sale any earlier will get you short term capital gains tax treatment.
I spoke to one CPA yesterday and he said the pre-construction investment can be treated as long term capital gain, when you give the money and sign a contract thats when the time starts.
I am not sure if IRS will belive it but has anyone paid longterm capitol gains on a pre-constrcution flip without holding please post here.
Maybe you guys are speaking to the same CPA. If so, this is not corroboration when the source is the same.
I agree. The contract itself could be considered a capital asset if held more than one year and the buyer was not in the business of buying & selling contracts.
However, the contract and the property to be purchased are two different assets. Once you close on the property, it’s a new asset and the holding period starts again. Tax law does not have any provisions allowing the holding period of the contract to tack on to the holding period of the real property.
So, if you close on the property, you would need to hold it more than one year to get capital gain treatment. I couldn’t tell from the original question if you were planning to sell the contract or the property itself.
Fenrir -
Our CPA says the same. We are in hard contract and are not in the business of buying and selling. As long as there is 12 months and 1 day between our contract date and our closing dates, any gains are treated as long term.
We did understand though that if we close on the unit and keep it ourselves, a new asset and holding period starts.
Thanks again,
Bailey
Just want to test my understanding on this one...
So, if you purchase a contract on a condo and it takes 12+ months to build on it, you would pay long term capital gains if you close and then sell OR sell prior to closing (as long as the duration is over 12 months). Correct?
And the profits generated from the flip cannot be tax sheltered by doing at 1031 exchange....unless you close on it and then sell. Correct?
Assuming in your example that dealer disposition tax treatment does not applySell the contract after holding it one year and a day, long term capital gain.Close on the condo, then sell the property any time within one year after settlement, short term capital gain.
And the 1031 exchange question?
Hello,
I have several precon homes under contract and I plan to flip most. I live in California but the houses are all out of state. What percentage will my gains be taxed at? (short term gains - 26%?)
Thanks for any input!
The federal tax on your property flipping income is based on your ordinary income tax rate. for your federal tax return, report your net income on Schedule C and Schedule SE.
At the state level, your income will be subject to state taxes both for the state where you live (CA) and the state where the property is located.
Yes, all are operating expenses of the building.
Since you are using one half of your building for your personal residence, then only one half of your expenses can be allocated to your rental unit and claimed on Schedule E.
Your electric usage if not separately metered, must be allocated between your residence unit and the rental unit.
Consult a professional tax advisor for specific details.
Newkidintown is right. but you MUST claim the income to get the benefits of the write offs. Capish???????