Long Or Short Capital Gains?
I am involved in several pre-construction deals in Florida. For each of these, I have to buy a lot, get a construction loan, and then wait approximately 12 months for the house to be built (owning the lot the entire time). After the house gets it certificate of occupancy, I will have to convert my construction loan into a perm loan.
Here is my question. If I sell after the conversion to perm loan, I will have owned the "property" for over 12 months--but I will have only owned the completed "house" that sits on the property for a few days (sort of). Would this sale result in long term capital gains (owned for over 1 year) or short term capital gains?
Also, what impact will such a sale have on my ability to 1031? Dealer status?
Thanks for any help!
If you are planning on turning them, then the properties are inventory and not capital assets for a business. As such, the gains will be taxed at ordinary income rates. If you rent them out, then they are capital assets and may be depreciated. You might check with your tax specialist as to when you might begin the depreciation. Since land is does not depreciate (tax-wise under most circumstances) you may not be able to start depreciating the building until it is complete. You can also do a 1031 exchange if they are rented or if you can establish that your intent was to rent. If you just sell the properties, you will not be able to do a 1031 exchange.
The answer to your question can not be simplified as easily as you wish. Why are you buying a lot in the first place?
Now if you don’t need the capital, which is gained from the resale, simply buy the property using a self directed IRA, that way all of the gain is tax deferred.
You could also sell the property to your PIT (private Annuity Trust) and borrow against it. a great way to receive life time income at a tax deferred status Remember loans are not income therefore not taxable.
Good Luck
Thanks everyone! I have much to think about...