The determination is: Are they "in the business" or not? Your client is in the business, so this would be part of ordinary income, even if a Spec Home was a new endeavor for them. It would be capital gain if they used the property for business, then later sold it, such as, built a shop or new office, or a model home in a development used as an office, first, because that is Placed In Service. Building a house to sell is essentially creating their own inventory, or Product for sale.