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Jon Andrews
Jon Andrews, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 3118
Experience:  I deal with all levels of tax planning and controversy - from the ordinary to the complex.
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Capital gain on my real estate

Customer Question

I've been getting different answers on this situation. I bought a piece of land and built a home on it. It took me about 16 months to complete construction. If I sell this property and Net 500,000K, would this be considered longterm capital gains or short term capital gains or just ordinary income. Would I be able to do a 1031 for another land so I can later build on or maybe an apartment, commercial buildings. What would the amount of tax I pay assuming I make 80K this year as personal income. Thank you very much
Submitted: 11 years ago.
Category: Tax
Expert:  Jon Andrews replied 11 years ago.

The answers depend on a number of factors including - was the home your residence? or was is it a "spec home"? or were you planning on renting it out after completion? or something else?


The answer(s) will determine - is it ordinary income or capital gain? and would I be able to do a 1031?


When did you buy the land? start construction? complete construction? What is the anticipated (or actual) sale date?


These answers will determine whether capital gain, if any, is ong term or short term.


All of the answers together will be needed to be able to estimate the amount of tax you would pay.


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Customer: replied 11 years ago.
Reply to Jon Andrews's Post: I bought the land in Octorbor 2004. Construction will be finished in 12/2005. Actual sale date is not known yet that is why i asked the question because of tax consequences. I am aware of the 250K or 500K for couple tax free advantage if you live in it as your primary residence for 2 years. However, I would leave me a big monthly payment every month and would tie up my money in the house for 2 year.
Customer: replied 11 years ago.
If I were to sale the house right after the completion of my construction in December of 2005 what kind of tax consequences do I get assuming I am married and both me and my wife make about 80K this year???
Expert:  Jon Andrews replied 11 years ago.

One of the issues that has impact on this question is - what type of property is the house? I know this sounds like a simple question, but the answer has far-reaching effects. For example, if this is to be your primary residence, it does not qualify for Section 1031 but it would qualify for capital gain treatment. If you are building it as a "business", it does not qualify for Section 1031 nor does it qualify for capital gains treatment. Additionally, certain ongoing costs may be either capitalized or expensed as you go along. If you are building the house as a rental property or an investment, it will qualify for Section 1031 and, potentially, for capital gain treatment.


Assuming that you can justify capital gain treatment, the next issue is "acquisition date". Under Revenue Ruling 75-524, the gain will be allocated between the land, the portion of the construction completed more than one year prior to the sale, and the portion of the construction completed one year or less before the sale. The land and the portion completed more than one year before the sale date will be long-term - taxable at 15% maximum rate. The remainder will be short term - taxable at the rate for regular income tax purposes. This tax rate will be based on your total taxable income including the gain.


To give you an idea of the total actual tax, I will need your estimate of the breakdown in basis between land, 1 year+ construction costs, and year or less constructions costs as well as the relative values of each of those at the time of sale.


jon

 

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