The short term capital gains tax rate for your tax bracket is 15%. Therefore the maximum tax impact of your $20K short term profit will be an additional $3000 in taxes. If you can wait a couple more months to sell, the long term capital gains rate will only be 5% for a $1000 tax bill on your sale profit.
Did you buy this property, inherit, or was it gifted to you? My response assumes that you bought the property yourself. If this is not the case, then you may get a different answer.
By the way, your filing status should be "married filing jointly". Head of household is usually for single parents with a dependent child in the house.
Thanks for the reply. I am all for not filing it. I just want to be prepared if I get audited.
So what would you think would fall into this personal property category? I just called an accountant in MD area and she said if we bought the properties with these items, then they are not personal properties, but we bought them afterwards, then they have their own ways of doing things and she refused to give out free advice.
If your LLC is registered with the state of MD, there is no way around filing the personal property return - I have filed several over the years. I believe there is a minimum fee of $100 with the return.
Newkid - thanks for the response. Your assumptions are correct and I agree with your analysis for the most part after rereading the relevant sections.
I thought that the 1250 recapture rate of 25% would only be applicable for depreciation taken after May 6,1997? The rest would not be subject to recapture as provided under the law when the 500k exclusion was enacted correct - perhaps not?
Thanks again for the input![ Edited by finniganps on Date 06/02/2006 ]
You are correct. The 25% recapture rate applies to depreciation allowed (or allowable) since May 1997. Depreciation taken prior to May 1997 is still "recaptured" but at the capital gains rate.
From an income tax perspective, I would say no, your plan as you have outlined it is flawed.
You are a developer to real estate. You plan is to sell all your properties, either in a traditional sale or on a lease option. All of these transactions are still dealer dispositions, in my opinion, regardless of the holding entity.
1031 exchange, capital gains tax treatment, and installment sales tax treatment are all denied to the dealer to real estate, regardless of the length of the holding period.
For answers to your other questions, you can probably find a question similar to yours in the appropriate forum for the topoic (SubjTo question in the Subject To Forum, entity structure in the legal forum, etc. )
You have some risk with your proposed transaction in that you intend to sell a portion of your assets. One of the key elements in a 1031 exchange is that you must have the INTENT to HOLD the property for investment purposes. The portion that you INTEND to HOLD long-term may qualify depending on the over all structure, but there will always be a degree of risk involved.
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Your stated intent is to sell all of the properties you are developing. Some you intend to sell in a conventional sale, the rest you intend to sell on a lease/option.
The fact that you are only "holding" the property until your buyer exercises his option still tells me that the property is held primarily for sale. Indeed, the length of the option period is immaterial because the property is always for sale during the full option term. In my conservative opinion, this is still a dealer disposition.
You give further support to my position by stating that none of the properties you are developing would be good for long term rental holdings. Instead, you want to acquire other property to hold for long term rental use.
The risk with your strategy is that you will be audited and all of your lease option 1031 exchanges will be disqualified and recharacterized as dealer dispositions.
Investors get hung up on the length of time they hold the property. The length of time is not the issue. The issue is what was the Investors real intent. If your intent is to hold for investment then you should have not problem. But, if your intent is to hold for sale it will not matter how long you hold the properties because you are still holding for sale.
If you build and then sell some and hold some you have now POTENTIALLY changed your intent to hold certain properties for investment. The risk is whether the IRS will agree with that position. You have started off with a developer/dealer status. Sold some. Held some. Your intent for the balance has changed to hold for investment. If you hold and rent for 18 or 24 months or more (the longer the better) you might stand a better chance that your intent for these properties could qualify as investment, but the IRS could also argue that you had the intent to sell form day one.
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Nope. You would be considered a Real Estate Dealer and pay ordinary income tax on your earnings, depending on the structure of your entity.
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It appears that you are in the 15% tax bracket.
The short term capital gains tax rate for your tax bracket is 15%. Therefore the maximum tax impact of your $20K short term profit will be an additional $3000 in taxes. If you can wait a couple more months to sell, the long term capital gains rate will only be 5% for a $1000 tax bill on your sale profit.
Did you buy this property, inherit, or was it gifted to you? My response assumes that you bought the property yourself. If this is not the case, then you may get a different answer.
By the way, your filing status should be "married filing jointly". Head of household is usually for single parents with a dependent child in the house.
Depending on where you live, you may also be subject to state income taxes on the gain.
Thanks for the reply. I am all for not filing it. I just want to be prepared if I get audited.
So what would you think would fall into this personal property category? I just called an accountant in MD area and she said if we bought the properties with these items, then they are not personal properties, but we bought them afterwards, then they have their own ways of doing things and she refused to give out free advice.
What is your business entity?
The properties is owned by LLC and were purchaed in 2005
If your LLC is registered with the state of MD, there is no way around filing the personal property return - I have filed several over the years. I believe there is a minimum fee of $100 with the return.
Wow, Newkid...good job.
I actually understood a sigificant portion of that...
Newkid - thanks for the response. Your assumptions are correct and I agree with your analysis for the most part after rereading the relevant sections.
I thought that the 1250 recapture rate of 25% would only be applicable for depreciation taken after May 6,1997? The rest would not be subject to recapture as provided under the law when the 500k exclusion was enacted correct - perhaps not?
Thanks again for the input![ Edited by finniganps on Date 06/02/2006 ]
You are correct. The 25% recapture rate applies to depreciation allowed (or allowable) since May 1997. Depreciation taken prior to May 1997 is still "recaptured" but at the capital gains rate.
I often fail to make that distinction.
Right on the money NewKidd! Great job in explaining!
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From an income tax perspective, I would say no, your plan as you have outlined it is flawed.
You are a developer to real estate. You plan is to sell all your properties, either in a traditional sale or on a lease option. All of these transactions are still dealer dispositions, in my opinion, regardless of the holding entity.
1031 exchange, capital gains tax treatment, and installment sales tax treatment are all denied to the dealer to real estate, regardless of the length of the holding period.
For answers to your other questions, you can probably find a question similar to yours in the appropriate forum for the topoic (SubjTo question in the Subject To Forum, entity structure in the legal forum, etc. )
You have some risk with your proposed transaction in that you intend to sell a portion of your assets. One of the key elements in a 1031 exchange is that you must have the INTENT to HOLD the property for investment purposes. The portion that you INTEND to HOLD long-term may qualify depending on the over all structure, but there will always be a degree of risk involved.
[addsig]
attre,
Your stated intent is to sell all of the properties you are developing. Some you intend to sell in a conventional sale, the rest you intend to sell on a lease/option.
The fact that you are only "holding" the property until your buyer exercises his option still tells me that the property is held primarily for sale. Indeed, the length of the option period is immaterial because the property is always for sale during the full option term. In my conservative opinion, this is still a dealer disposition.
You give further support to my position by stating that none of the properties you are developing would be good for long term rental holdings. Instead, you want to acquire other property to hold for long term rental use.
The risk with your strategy is that you will be audited and all of your lease option 1031 exchanges will be disqualified and recharacterized as dealer dispositions.
Just my opinion
Investors get hung up on the length of time they hold the property. The length of time is not the issue. The issue is what was the Investors real intent. If your intent is to hold for investment then you should have not problem. But, if your intent is to hold for sale it will not matter how long you hold the properties because you are still holding for sale.
If you build and then sell some and hold some you have now POTENTIALLY changed your intent to hold certain properties for investment. The risk is whether the IRS will agree with that position. You have started off with a developer/dealer status. Sold some. Held some. Your intent for the balance has changed to hold for investment. If you hold and rent for 18 or 24 months or more (the longer the better) you might stand a better chance that your intent for these properties could qualify as investment, but the IRS could also argue that you had the intent to sell form day one.
[addsig]