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I purchased property 11.15.10 to build a 2 unit condo. I will

Customer Question
be living in one and...
I purchased property 11.15.10 to build a 2 unit condo. I will be living in one and selling one. The demo started 8.1.11 to that point i had 100,000 into project not counting the property cost. My EDC is Nov 15,2013. if i sale the condo at in Nov. what will my tax rate be.I thought it would be long term captial gains NOT income. What is it going to be?
Submitted: 5 years ago.Category: Tax
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Answered in 18 minutes by:
4/1/2012
Tax Professional: gregmey, CPA replied 5 years ago
gregmey
gregmey, CPA
Category: Tax
Satisfied Customers: 147
Experience: Certified Public Accountant & Certified Financial Planner
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gregmey :

Hi, my name is XXXXX XXXXX I'm happy to help you with your question today.

gregmey :

The sale of your condo would be treated as a long term capital gain because the sale date is over 1 year from your original purchase date.

gregmey :

In 2013 long term capital gain tax rates are scheduled to increase to 20%. Currently long term capital gains are taxed at 15%.

gregmey :

Congress may extent the 15% lower long term capital gains rate but no one really knows what will happen. If they do nothing, the rate increases to 20%.

gregmey :

I hope this answers your question. If you need further clarification or have additional questions please let me know.

gregmey :

Thanks, Greg

Customer:

this does not address my question. Does the clock start ticking when the property is bought or the day construction starts?

gregmey :

The clock starts when the property is purchased.

Customer:

My accountant is telling me i have to regular income tax on the gain

gregmey :

What is their reasoning for this?

gregmey :

If you depreciated the property (as rental property) for the few years you owned it, then you would have ordinary income for the depreciation recapture. However, any increase over basis would be capital gains.

Customer:

this would be about 40%....when i sell one of the condos I will have owned the property for at least 2 years. during the first year of the build i pay regular. after will be long term. i don't know how this would get figured out i guess % of build.

Customer:

I did not depreciate the property. I bought it and started working on building. i never had renters

gregmey :

What income would you have in the first year?

gregmey :

You would only have to recognize income in the year you sell and at that point it would qualify for long term capital gains treatment.

Customer:

because i have owned it for longer than 1 year?

gregmey :

Yes, you would get long term capital gain treatment because you owned the property for more than 1 year.

Customer:

can i write off the interest on the property while i am building?

gregmey :

Yes, you can write off the interest against any rental income (which you stated you don't have). You can only offset your ordinary income with the interest on the 2nd condo if you actively participated in rental real estate.

gregmey :

Will the building be on both condos or just the one you are selling?

Customer:

this2 unit cond is under construction. The subdivision has not been filed with the LA county yet. So both units still have the same address. It will be in July when they get seperated.

Customer:

I am renting a house while i build. So i have no other mortgage

gregmey :

You can deduct the mortgage interest on 2 properties if they are for personal use. Therefore, I suggest you deduct the mortgage interest in full until the separation in July.

Customer:

Great, Thanks i hope i can get my accountant on board with this

gregmey :

Glad I could help. Please let me know if you have any additional questions in the future.

gregmey
gregmey, CPA
Category: Tax
Satisfied Customers: 147
Experience: Certified Public Accountant & Certified Financial Planner
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