Purchasing a lot for investment.


B

beckkl

I am currently considering buying a lot in a new subdivision for
investment. I want to hold the lot for two years, at which point I
will sell it and use the profits to build a home on the other lot I
purchased. Does my calculations make sense?

Cost of Lot: $89,800
Downpayment on Lot Loan: 10% or $8,980
Amount Financed: $80,820
Loan Interest Rate: 6.755%
Amount Paid in interest after 2 years: $10659.90
Rough estimate of tax deduction for Interest: 28% or $2984
Total Cost of Carrying Loan for two years: 10659.9 - $2984 + $1000
closing costs = $8675
Lot sale price to break even: $89800 + $8675 = $98475

Is this correct?
 
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T

Tad Borek

beckkl said:
Amount Paid in interest after 2 years: $10659.90
Rough estimate of tax deduction for Interest: 28% or $2984

Ignoring the "what if it doesn't go up?" question...are you sure that
you can take the interest deduction? Have you run that by your
accountant to be certain that you can? You don't mention how you would
finance it but if it's characterized as investment interest expense you
might not see the deduction immediately (you need equal or greater
investment income; otherwise it's carried forward, so you end up getting
a benefit someday, but you don't get the immediate cash-flow benefit of
reduced taxes).

This is a slightly complicated question, good idea to talk w/an
accountant, but here's a start from the IRS site:
http://www.irs.gov/faqs/faq-kw98.html

-Tad
 
B

beckkl

Publication 550 says this:

Investment Interest

If you borrow money to buy property you hold for investment, the
interest you pay is investment interest. You can deduct investment
interest subject to the limit discussed later. However, you cannot
deduct interest you incurred to produce tax-exempt income. See
Tax-exempt income under Nondeductible Expenses, later. Nor can you
deduct interest expenses on straddles, also discussed under
Nondeductible Expenses.

Investment interest does not include any qualified home mortgage
interest or any interest taken into account in computing income or loss
from a passive activity.


Investment property

Property held for investment includes property that produces interest,
dividends, annuities, or royalties not derived in the ordinary course
of a trade or business. It also includes property that produces gain or
loss (not derived in the ordinary course of a trade or business) from
the sale or trade of property producing these types of income or held
for investment (other than an interest in a passive activity).
Investment property also includes an interest in a trade or business
activity in which you did not materially participate (other than a
passive activity).



I would think I would be ok then, right? The lot will be financed
through a lot loan via a mortgage broker.
 
C

CIL

Good evening.

Don't for get There will be Property taxes while you own the property and
capital gains on the sale.

Have a great weekend.
 
B

bo peep

I'm not following your logic. If the lot increases in value by 10% per
year, after 2 years it will be worth about $108,658. If we subtract
from that the break even cost of $98,475, we have a net profit of
$10,183

How can you build a house for $10,183?

John Cowart
 
T

Tad Borek

beckkl said:
I would think I would be ok then, right? The lot will be financed
through a lot loan via a mortgage broker.

What do you mean "be OK?" Let's say you pay $5k in interest in 2006...do
you have $5k in investment income (not salary/wages but investment
income)? If not and this is characterized as investment interest
expense, then you won't be able to take the deduction now and you truly
have $5k going out the door with no immediate tax deduction to offset it.

This really needs to be looked over by an accountant to see exactly what
the net tax effect will be and which if any of your costs can land on
your tax return while you're holding the property. You might end up
needing a higher sale value to break even.

And again, there's that risk the property doesn't appreciate in value
but that's another topic!

-Tad
 
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J

John A. Weeks III

beckkl said:
I am currently considering buying a lot in a new subdivision for
investment. I want to hold the lot for two years, at which point I
will sell it and use the profits to build a home on the other lot I
purchased. Does my calculations make sense?
No. You don't factor in risk. Raw land is one of the worst
investments you can make. It might sit years and years before
someone else comes along and sees any value in it. Plus in
a development, you are competing with other developers who might
just decide to drop the lot prices to help sell more houses.
Investing in land is only for the most sophisticated investors
who are in the real estate and development business, or who have
lots of money that they are willing to lose.

-john-
 
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B

beckkl

All great points..... I'll just purchase the one that I am looking to
build on. Thanks for your help.
 

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