Rolling spec house profits into next house. How?

Question

This is probably a bonehead question but I've been talking to some spec home builders and they are paying taxes on all profit from a spec home at personal capital gains tax rate. A heavy hit on a big project. I'm just curious - it seems like a big housing developer like Landsea homes for instance would take all proceeds from a development sale and count it as assets on the company balance sheet, then deploy that money on the next project. Isn't that what big companies do? Like a car maker for instance. They don't count profits on each car as income then pay taxes on that. They just collect that money on their balance sheet so they can use it to build more factories or reinvest in the company. Isn't that how it works? If that is how it works - Can that business structure be applied to a developer? What business structure is required if this is possible?

Greg Scott · Answer

Your supposition is incorrect.

Working currently both in automotive and in real estate, I can confirm that automotive companies report the profit from the sale on each car sold, when it is sold.  They track that data religiously.  The same thing happens in real estate.  Doing anything else would be illegal.

What you should be looking for are tax write-offs that offset that gain so you can keep the cash.

Matt Devincenzo · Answer

I think you're speaking to how some corporate structures allocate costs for things like R&D which are large and up front, but don't create a salable asset immediately. You see this mentioned in use by auto, tech, medical research ect. where they say a vehicle costs 20K to produce and 10K in R&D but was sold for 10K in 'net' profit. It's not that they're not paying on their profits, it's just a portion of the expenses was spent 10 years earlier on costs to develop the product.

As far as builders, it's creation of inventory, so no favorable 'deferral' of taxes from the govt there. Death and taxes, the only two sure things in life.

Skye Parker · Answer

Well as you can tell my understanding of the process is - lacking. Now I understand why builders love write-offs. Thank you guys.