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After some research I believe this business model would dictate that the sale would be ordinary income unless the property was either a rental before a rebuild or converted to a rental after a new build. Then it would qualify as a capital gains sale. Is my thinking correct?
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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.
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That's exactly how I interpret it. Just wanted confirmation of my thought process. Thanks.
