Short term/long term


W

Wayne Rivers

Question:

If someone owns land and builds a spec home on it and later
sells it, is the capital gain long term because the land is
owned over 1 year or short term because the house is sold
soon after completion?

In this case, the taxpayer is not planning on doing this as
a business - should be a one-time shot. He did the general
contracting himself.

Thanks

Wayne Rivers, CPA
 
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D

Dick Adams

Wayne Rivers said:
Question:
If someone owns land and builds a spec home on it and later
sells it, is the capital gain long term because the land is
owned over 1 year or short term because the house is sold
soon after completion?
What is a "spec home"? If "spec home" means he built it on
the 'speculation' of making a profit, then his profits are
ordinary income.

Dick
 
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S

Stuart A. Bronstein

Wayne Rivers said:
Question:

If someone owns land and builds a spec home on it and later
sells it, is the capital gain long term because the land is
owned over 1 year or short term because the house is sold
soon after completion?
It's ordinary income because he built it to sell, not as a
long term investment.

Stu
 
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D

dsellinger

It's ordinary income because he built it to sell, not as a
long term investment.
Isn't the whole idea of building a house to sell considered
an investment? Besides an owner may have bought property
with the idea of keeping it, but market forces are such that
selling it would be considered the wisest use of said asset.

In~vest~ment n. - Property or another possession acquired
for future financial return or benefit.

And long term is defined by the IRS as longer then one year.

Unless there are some rules about holding periods being
somehow "reset" by a major change to a property. (Could the
issuance of new higher valued stock in a takeover be viewed
in the same way? would your initial date of ownership be for
the issuance of the new stock, or for the date you bought
the original now taken over companies stock.)
 
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V

Victor Roberts

Dick Adams said:
What is a "spec home"?
Usually one built to your specifications as opposed to a
mass produced home or even an individual home built to an
existing plan.
 
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D

Dick Adams

Usually one built to your specifications as opposed to a
mass produced home or even an individual home built to an
existing plan.
Keep in mind - the bulk of his profits come from the general
contractor (GC) fees he avoided by doing the work himself.
He certainly does not want to pay himself so he can pay the
self-employment taxes.

Also since he acted as his own GC, he may have a problem
convincing an auditor that the house was intended to be
his personal residence.

But even before you get that far, his gain on the house is
ordinary income because he did not own the house for at least
the year. He may have an argument on the land.

Dick
 
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D

Dick Adams

(e-mail address removed)
Isn't the whole idea of building a house to sell considered
an investment? Besides an owner may have bought property
with the idea of keeping it, but market forces are such that
selling it would be considered the wisest use of said asset.

In~vest~ment n. - Property or another possession acquired
for future financial return or benefit.

And long term is defined by the IRS as longer then one year.
We are on the same page so far. And note the holding period
for the house begins when it is completed.
Unless there are some rules about holding periods being
somehow "reset" by a major change to a property. (Could the
issuance of new higher valued stock in a takeover be viewed
in the same way? would your initial date of ownership be for
the issuance of the new stock, or for the date you bought
the original now taken over companies stock.)
In the OP's situation, the owner of the land added capital to
the land creating a second asset. To make the situations
analogous, the shareholder would take the conversion and buy
additional shares.

Dick
 
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L

L K Williams

What is a "spec home"? If "spec home" means he built it on
the 'speculation' of making a profit, then his profits are
ordinary income.
I've always understood the term to apply to a house built on
"speculation." That is, a house built without intending to
live in it but to sell it upon completion. All with the
speculation that the final sale will result in a profit.

Lanny K. Williams, CPA
Nawarat, Williams & Co., Ltd.
Income Tax Services for Expatriate Americans
 
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H

Harlan Lunsford

Wayne said:
Question:

If someone owns land and builds a spec home on it and later
sells it, is the capital gain long term because the land is
owned over 1 year or short term because the house is sold
soon after completion?

In this case, the taxpayer is not planning on doing this as
a business - should be a one-time shot. He did the general
contracting himself.
Then it is not a "spec home", rather a "spec"ulative house.
(A house is not a home, but that's another story.)

anyway, it's a short term event, based on completion of the
house, and not the longer term ownership of the underlying
land.

ChEAr$,
Harlan Lunsford, EA n LA
 
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D

Don Priebe

What is a "spec home"?
Usually one built to your specifications as opposed to a
mass produced home or even an individual home built to an
existing plan.
OR ... a house built on speculation - one where there is not
a purchase contract in existence before construction is
begun. (That's the common usage of the term in our area.)
 
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V

Victor Roberts

Keep in mind - the bulk of his profits come from the general
contractor (GC) fees he avoided by doing the work himself.
He certainly does not want to pay himself so he can pay the
self-employment taxes.
I don't see where the OP even suggested this.
Also since he acted as his own GC, he may have a problem
convincing an auditor that the house was intended to be
his personal residence.
A friend my mine built a house not far from here and he
acted as his own general contractor, and he still lives in
the house after at least 5 years. I think the issue of the
"intention" can best be inferred from whether or not he ever
lived in it, whether it was his primary residence and for
how long, and why he moved. I assume this is not black and
white.
But even before you get that far, his gain on the house is
ordinary income because he did not own the house for at least
the year. He may have an argument on the land.
Agreed.
 
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S

Seth Breidbart

Isn't the whole idea of building a house to sell considered
an investment?
No, _buying_ a house to sell is an investment. Building a
house to sell is a _business_.
In~vest~ment n. - Property or another possession acquired
for future financial return or benefit.
He didn't "acquire" the house, he built it.

Seth
 
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S

Stuart A. Bronstein

Usually one built to your specifications as opposed to a
mass produced home or even an individual home built to an
existing plan.
Where I come from "spec" stands for speculation. That is,
he builds it with the intent and hope of selling it for more
than what he put into it. Some people make money doing
that, some actually lose money.

Stu
 
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S

Stuart A. Bronstein

No, _buying_ a house to sell is an investment. Building a
house to sell is a _business_.
Actually, even buying a house with the purpose of turning
around and selling it makes the house inventory rather than
an investment. For example, you are able to buy a house in
a foreclosure sale and think you can make some money from
it. So you clean it up, paint it and sell it.

Even if it takes longer than a year to sell, if the purpose
of the purchase was to turn around and sell it, it's
inventory.

Stu
 
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S

Seth Breidbart

Stuart A. Bronstein said:
(e-mail address removed) (Seth Breidbart) wrote:
Actually, even buying a house with the purpose of turning
around and selling it makes the house inventory rather than
an investment.
What sort of property does that rule apply to?

It clearly doesn't apply to stock.

Seth
 
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D

Drew Edmundson

Stuart A. Bronstein said:
(e-mail address removed) (Seth Breidbart) wrote:
Actually, even buying a house with the purpose of turning
around and selling it makes the house inventory rather than
an investment. For example, you are able to buy a house in
a foreclosure sale and think you can make some money from
it. So you clean it up, paint it and sell it.

Even if it takes longer than a year to sell, if the purpose
of the purchase was to turn around and sell it, it's
inventory.
As an aside, and not in any way disagreeing with your
overall comments, real estate cannot be "inventory." See
Rev. Rul. 69-536. It is "property held for resale." A
semantic thing for these purposes. However for other
purposes it is a real and important difference, e.g. not
being "inventory" prohibits the use of FIFO, LIFO, etc.
 
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S

Stuart A. Bronstein

What sort of property does that rule apply to?
It applies to any property purchased or created for the
purpose of selling, rather than holding for investment or
personal use.
It clearly doesn't apply to stock.
Why do you say that? What does "stock" mean? If you are
a developer and buid 100 condominiums, all the income from
sales will be ordinary income, even if some of them are
sold more than a year later.

Stu
 
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S

Stuart A. Bronstein

Drew Edmundson said:
As an aside, and not in any way disagreeing with your
overall comments, real estate cannot be "inventory." See
Rev. Rul. 69-536. It is "property held for resale." A
semantic thing for these purposes. However for other
purposes it is a real and important difference, e.g. not
being "inventory" prohibits the use of FIFO, LIFO, etc.
Thanks for the clarification. I wasn't aware of that nuance.

Stu
 
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D

Dick Adams

Drew Edmundson said:
As an aside, and not in any way disagreeing with your
overall comments, real estate cannot be "inventory." See
Rev. Rul. 69-536. It is "property held for resale." A
semantic thing for these purposes. However for other
purposes it is a real and important difference, e.g. not
being "inventory" prohibits the use of FIFO, LIFO, etc.
Real Estate is held in a control account similar to securites
being held for the short-term unless it is being rented in
which case it belongs in an account with income producing
assets.

Although you may refer to it internally as inventory, it is
not inventory for either accounting or tax purposes.

Dick
 
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