Taxes on Sale of Property Held for less than 1 year

[Michael R.]

I have a few properties I am going to sell. One I have owned almost one year the other 3 I have owned less than one year. They are great properties but I just wanna sell and clear up some debt I have and put myself in a more secure position. I have heard from other investors as well as my accountant that I should hold the properties for more than one year to pay less taxes on the sale. I never asked my accountant why (well maybe i did but i forgot) because I was not planning to sell at the time. So is this true and if so what is the reason?

Also another question is if I sell and finance the sale do I have to pay all of the taxes on the sale up front in the year I sell the property? Or do I just pay taxes in the year the payments are recieved?

[Jon Holdman]

Ignoring the installment sale for the moment, you pay capital gains tax on the amount of gain from the sale. If you hold at least a year, its long term capital gains tax, currently 15%. If you hold less than a year, its short term capital gains tax, which is the same as your marginal rate. Gain is net selling price less basis. Net selling price is the actual selling price less all costs (e.g., title insurance). Basis is the purchase price plus any capital improvements, plus purchase costs, less depreciation taken or allowed.

There's another thread that discusses installment sales. Its somewhat complex because there are two types of income from an installment sale. One is the gain from the sale, which is a portion of the down payment and principle payments you receive. Some of the principle payments are the basis and so don't get any tax. The interest payments are fully taxable as ordinary income.

You need to have a more thorough chat with your CPA because this is a complex subject.