Tax Planning for Buying, developing and selling multiple units

[Richard Chang]

Hi all,

I was interested to find out the basics for tax planning for a real estate
project to buy a lot and remove existing structures and have 3 units built
with 1 being kept by the owner.

How would I find information on minimizing tax on the sale of the other 2 units
etc. I read that the units would be taxed as ordinary income ?
Is their a way to maybe do 1031 exchanges to a new project investment to avoid this etc.
Should this be done in an LLC etc.

Best to all, Rich C

[Account Closed]

What you are talking about is development. When you develop land it is treated as a business and treated as ordinary income. The costs to develop the land must be rolled up into the basis of each lot and are only deductible when a lot is sold.

A 1031 is not available in this situation since these are essentially inventory.

Like Jon Holdman mentions though if your intent is to develop and rent these out, your situation changes. Investment property can be exchanged and you can deduct a great deal more in expenses. Also your rental income would likely be treated as passive therefore not subject to SE tax.