Question for you property flippers....

If you buy a preconstruction condo, take it to hard contract, hold it for 12 months, then sell or reassign the contract to someone else, will you be taxed at ordinary income or long term capital gains tax?

 

I am not an accountant, but I bet my accountant would say that if you hold it 1yr + 1day from the date of closing (not date of contract), you will be taxed on the long term capital gains, currently no greater than 15%. Sell it two days earlier and get ready to fork out the big bucks (ordinary income tax rate).

 

So you have to actually close on the property and hold it for 12+ mos. Hard Contract does not count?

 

That is correct, Sir.
With a hard contract, you have only equitable interest in the property, but you are not the "owner." The owner is listed on the Warranty Deed, which will show the owner as the Development, until the time of close. The IRS is looking at length of time for "ownership" to calculate tax rate.

 

Another example of the "Man" trying to keep a brotha down

 

Except securities, jewelry, art, snowdome collections, whatever, if held for one year and then sold at a profit are all considered long-term capital gains, correct?

Why would a contract be any different?

 

I AM NOT AN ACCOUNTANT. IS THERE AN ACCOUNTANT AVAILABLE?

My guess is:
The IRS interprets a signed contract as having only equitable interest and does not mean that you own the property. To "hold" property means to "own" property, rather than having only equitable interest. The IRS is looking for the date which the money is exchanged for the property (the exchange of goods). That would be the date of closing. It makes sense to me.

Question -- What are snowdome collections???

 

Smiling Joe is correct. in order for the one year period to commence, you must hold both equitable and legal title. a purchase agreement only transfers equitable title.

 

Smiling Joe, I think snowdome collection refers to those water-filled souvenirs available at Wal-Mart and other fine retailers. It could also refer to old guys w/dandruff driving around in their Sebring convertibles.

 

Interesting question raised this morning. I just spent a half hour on the phone with my CPA. He advised me that if you assign the contract after 1 year it is treated as a capital gain not ordinary income. He stated he has had a lot of clients who have flipped properties in Galveston Tx. Just my 2 cents

 

Sounds like I need an new accountant

 

although i am an attorney (ceo of a private reit ) and have commercial office buildings in 7 states, i am not a cpa. nevertheless, i would be surprised if capital gains treatment would apply in an instance where the purchaser never closed, but merely assigned a purchase agreement. but, again, i am not a cpa.

 

CONCUR!!! :clap_1:

 

You must own it for 12 months and a day. Having a contract is not sufficient, the developer still owns the ongoing incomplete condo.

To get around this, legally by the way. You establish a LLC, have the LLC own the condo, get buyer prior to closing and 'sell' your LLC. As long as your LLC has been established for longer than 12 months and 1 day you only pay 15% cap gains.

We start LLC's frequently for this purpose down the road of selling the LLC.

 

How does one sell a LLC to a buyer who thinks they are buying a condo? Tell me more. I'd like to know how the process works.

 

Very interesting. Sounds reasonable, but would probably scare most people around here. I have not heard of people doing this in this area, but I can feel the ground shake as people run to their accountant while I type.