Tax implications on Spec Home

[John Hopf]

I am new to BP, and have spent hours combing thorough the forums...  it is remarkable how giving and generous so many of you are, thank you.

With that being said, I am looking to build my first spec home.  I have learned from my reading on BP to give as much info as possible... so here it goes:

- bought a lot ($235k), have a builder ($700k), holding and closing costs ($60k), trusted relator ($65k),  financed through some cash and bank approved note.

- comparable sales in the area are $1.3M

- Expecting budget to go over budget 10%

- That would leave ~$130k profit

(little detail about me: son of a contractor, been around the trades, owned rental properties since I was 22, not exactly risk averse - I am 33 so I have time to recover)

My questions are:

1) With spec building, what margin is ideal?  does that ideal margin change with more expensive projects?

2) I am looking to minimize my tax implications as much as possible.  I know intent is what determines if this will be classified as ordinary income or capital gains - how is that intent determined? (my wife and I may live in this house for a year or two) 

3) Is a S-Corp or LLC a better entity to form for this project?

4) In order to Net the highest profit (after tax), what would the best situation be? (ordinary income or capital gains)

5) To eliminate $500k (married couple) of Capital gains, does the 2 or 5 years start once the house is completed or once I purchase the land?

6) To complete a 1031 exchange in this scenario, do I have to re-invest $1.3M in order to have $0 in capital gain tax? or can I purchase 1 lot (~$200k) to eliminate capital gains?

Sorry for the length, and I am truly appreciative of any and all advice!!

Thank you.

- John