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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3746
Experience:  Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
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I am looking to purchase a lot and build a fourplex on the

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I am looking to purchase a lot and build a fourplex on the property. After the property is completed, I intend to Convert the units into condos and sell off the four units while retaining control of 50% of the underlying land asset on which I intend to build an additional four units. How would sales be taxed on the the first four units should I hold them for over 12 months? Would there be a major benefit holding this is a S-Corp or a LLC? Thanks in advance for any feedback you can provide, Bill
Submitted: 11 months ago.
Category: Tax
Expert:  Lane replied 11 months ago.


Hi,

The taxable event here will be when you sell the Condo's.

Unless you do enough of this to be considered a dealer by IRS, this will be a capital gain.

Assets held less than a year will not qualify for long term capital gains, but would be taxed at your marginal rate (added to your other income for the tax year and taxed at that highest rate).





If you hold for a year or longer, you will get the long term capital gains rates... as follows:


0% applies to long-term gains and dividend income if a person is in the 10% and 15% tax brackets,

15% applies to long-term gains and dividend income if a person is in the 25%, 28%, 33%, or 35% tax brackets, and

20% applies to long-term gains and dividend income if a person is in the 39.6% tax bracket.

Plus the additional 3,8% medicare tax on the investment income for those having a modified income of 30,000 for those filing single and 50,000 for joint filers.



IN terms of you ownership questions, because both S-Corps and LLCs are pass throughs, (taxed to the individual, rather than to the business) TAX-WISE there will be little difference.

The reason to do an LLC or as S-Corp would be for liability protection. Business creditors, lawsuits, etc will not be able to come after your personal assets or income if this entities are set up and maintained correctly.

If you use a C-Corp (which IS taxed at the entity level) you lose the benefit of the capitals gains treatment, because everything will be taxed to that corporation as corporate income AND then you'll be taxed on any profits coming from the C-Corp again (the double taxation you've probably heard about) as dividends




Hope this helps

Lane

If this HAS helped, I would appreciate a feedback rating of 3 (OK) or better … That's the only way they will pay us here.

HOWEVER, if you need more on this, PLEASE COME BACK here, so you won't be charged for another question.
Expert:  Lane replied 11 months ago.


Sorry for the typos (on the additional medicare-cap gains tax I said), "Plus the additional 3,8% medicare tax on the investment income for those having a modified income of 30,000 for those filing single and 50,000 for joint filers."

Should have read ..., "Plus the additional 3,8% medicare tax on the investment income for those having a modified income of 200,000 for those filing single and 250,000 for joint filers.
Customer: replied 11 months ago.
Thanks a million Lane! I really should have gone into a lot more detail in my intitial question. I am looking to buy a property and build a 4plex on it which I intend to turn into condos and sell off individually. The land is large enough that I could build up to eight 1250 square foot condos on the land. As land cannot be deprecated what accounting method would be applied to the figuring of he cost of the condos including the portion of the land assets in the total price. If the LLC was to not realize a profit on the development and sale of the first four condos, but retain an ownership interest in the land would there be no capital gains due until the remaining land was sold and/or developed? Could the condos be sold to myself or a family member at or below cost where we would in turn live in them for 24 months with the intention of selling them at market rates to capture the 500,000 USD tax free capital gain for a married couple? How best would non-US persons be able to fund the project if they wanted to invest the the project? If they were to invest in the project as equity investors would they be able to avoid punitive US taxes? Again thanks for any insight you can offer. Best regards, Bill
Expert:  Lane replied 11 months ago.

Hi Bill,

First, let's start with allocating the basis of the property you've bought:

If you buy a tract of land and subdivide it, you have to, first, determine the basis of each lot (so you can figure the gain or loss on the sale of each individual lot).

This way you don't recover your entire cost in the tract until you have sold all of the lots. To figure the basis of an individual lot, multiply the total cost of the tract by a fraction, where numerator is the Fair Market Value of the lot and the denominator is the Fair Market Value of the whole tract of land.

You should also know that the IRS DOES say that (with their consent) if you're are a developer and sell subdivided lots before the development work is completed, you can include in the basis of the properties sold an allocation of the estimated future cost for common improvements.

See Revenue Procedure 92–29 for more information, including an explanation of the procedures for getting consent from the IRS. And here's the IRS guidance on allocating the basis: http://www.irs.gov/publications/p551/ar02.html#en_US_2010_publink1000256927



ON selling the Condos to Family members, just be sure that you report the gain or loss a they actually occur and you'll be fine.

And as long as THEY do live in them as their personal residence, (for any 24 months out of the last five years at the time they sell) then the personal residence capital gains exclusions WILL apply for them.



Hope this helps

Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3746
Experience: Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
Lane and 3 other Tax Specialists are ready to help you
Expert:  Lane replied 11 months ago.

Thanks for the rating Bill!

Let me know if I can help again.

If you’d like to work with me again, say “For Lane only …” at the beginning of your question.


Thanks again,

Lane
Expert:  Lane replied 11 months ago.
Hi Bill,


I'm just following up with you to see how everything is going. Did my answer help?


Let me know,
Lane

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