Tax on new build sale?

Question

Hi all,

I just joined and hope I am posting in the correct forum.

I plan on buying a one acre lot near where I live to build a house on and then to sell it when it`s completed. My question is will I be taxed heavily on this? I`ve heard some say that I have to live in it for a year otherwise I`ll be taxed at a higher than normal rate.

My goal is to build and sell and repeat until I`m a squillionaire :)

I just moved here from Ireland and am a complete beginner to real estate and tax law here.

Matt Devincenzo · Answer

I assume you're talking about federal/state income tax, not property taxes.

A flip or a spec build will be taxed at your normal income tax rate, it's not a capital gains taxable sale. It will be treated as a business or earned income, not passive investment income. So you're likely looking at somewhere in the neighborhood of 30-45% tax rate (just a guess). Just holding for a year doesn't change that, it's still earned income.

Now if you move in and live there for 2 years as your primary residence, you can use the section 121 home sale exclusion and take the gain tax free. It sounds like that may have been what you had been hearing about to reduce the tax burden.

Matt Devincenzo · Answer

@Daria B.in short, no there is no IRS defined timeline for a flip/investment. The IRS discusses the criteria as what your "intent" with the asset is. There is a short/long term capital gains time, which is often defined as "making" an asset subject to cap-gains vs. earned income if you hold for a year and a day, but that just isn't the way the IRS has defined it. The IRS sees it as

1) You bought an investment and it is subject to capital gains (either short or long term)

2) You bought inventory for your business and are subject to earned income. Flipping is considered a business activity, and homes you buy to flip are your inventory.

So here's an example: You flip 20 homes a year and for whatever reason buy a tenant occupied home. You decide to just wait out the lease, which has 10 months left and because it's winter decide to let them stay 3 more months to get to prime spring/summer selling season. They move and you get everything cleaned up ready for sale, and list it. So you've now owned this home for 13-15 months and decide to report it as capital gains. How do you REALLY think that IRS audit would look when you flip 20 houses a year, but say this one wasn't purchased to be a flip???

That is why several accountants/CPAs ect here on the board recommend if you are doing both, you need to have separate entities set up. One you can flip in, one you can buy and hold. That can help show when you purchased this particular house your intent was for investment since all you rentals exist in that entity.

I'm sure plenty of people have, and will continue to get away with not declaring income the way they should. I'm also sure many have done it, and have gotten caught.

Daria B. · Answer

Sure thing @Al Brennanglad I could help.

Hey @Matt Devincenzois there a certain amount to time that would have elapsed for the gov (IRS) to view the "flip" as not a "flip" and impose capital gains? Say for instance, one purchased a property (not like what Al wants to do) with the intent to flip it but for what ever reason, they still had it for 2 months then turned it into a rental that rented for 6mo or a yr, then were able to sell it afterward. I don't know if that's a good example, basically I'm wondering when a "flip" is not considered for "earned income" but rather "capital gains" or does it only matter with respect to how long the property is held.

"A flip or a spec build will be taxed at your normal income tax rate, it's not a capital gains taxable sale. It will be treated as a business or earned income, not passive investment income."

Daria B. · Answer

welcome @Al Brennan.

Property tax is based on the assessors value they place on the property. Mileage is the same for everyone whether owner-live in or investment and owner does not live in.

If you live in the property then you get to homestead which reduces an amount from the assessed value, thereby, reducing your tax payment. They deduct any homestead amounts from the accessed value. Ie assessed is $100k and your homestead is $25k so your base for which taxes will be on is $75k.

I'm not sure how long and when you apply for homestead when that kicks in. You can call the appraisers office in the area you are looking at buying. They are a wealth of information.

Daria B. · Answer

succinctly put @Matt Devincenzo.

So far I have been sticking to one investment strategy. I did want to entertain doing a flip of all the right things were in place. I see I have more homework to do though before engaging in any deal. Thanks for clearing that up.

Al Brennan · Answer

Thank you Daria...much appreciated. Do you know how capital gains tax might be calculated?

Tax on new build sale?

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