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Long term gain

Forum|Forum|4 years ago
August 16, 2021
7 replies
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Client bought a lot in 2014 for investment , built home on it in 2020, then sold in 2020. Would that be bought investment, added improvements, then sold for a long term capital gain. Client is not in real-estate at all. First, and only time investing in real-estate. Appreciate your thoughts.

Thanks

ProSeries Professional

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Best answer by Just-Lisa-Now-

Sch D, Long term, just like any investment purchased over a year before selling.... that's how I would do it. Hes not in the business of flipping, so I dont know why Sch C would be considered here.

EDIT: My answer is wrong...scroll down for the proper way to handle the improvements to the property.

BobKamman

Level 15

There's always a first time for anyone, even in real estate. You can keep it off Schedule C, but IRS might see a duck quacking.

Just-Lisa-Now-

Answer

Intuit Community Champion

Sch D, Long term, just like any investment purchased over a year before selling.... that's how I would do it. Hes not in the business of flipping, so I dont know why Sch C would be considered here.

EDIT: My answer is wrong...scroll down for the proper way to handle the improvements to the property.

♪♫•*¨*•.¸¸♥Lisa♥¸¸.•*¨*•♫♪

BobKamman

Level 15

@Just-Lisa-Now- Say the lot cost $1,000 and the house cost $500,000 to build, three months before it was sold. Still long term?

@IRonMaN "I'm willing to bet one quacking duck isn't going to catch anybody's attention" -- That's a safe bet unless the duck has a spiteful ex-wife who knows how to file a Form 211.

"My client's not a murderer. This is the first and only time he killed someone."

Just-Lisa-Now-

Intuit Community Champion

if you bought a stock for $1 that sat there doing nothing for 5 years, then it skyrocketed to being worth $500 and you sold it....still long term?

♪♫•*¨*•.¸¸♥Lisa♥¸¸.•*¨*•♫♪

IRonMaN

Level 15

So a duck quacks. Didn't they invent shotguns to keep those ducks quiet?

As a side note, for years I looked at returns prepared by other preparers wondering why the IRS never swooped in on something so obvious that even a blind squirrel could see they missed the boat. I'm willing to bet one quacking duck isn't going to catch anybody's attention at the IRS. Besides, maybe the duck will get COVID and develop a case of laryngitis. 🦆

Slava Ukraini!

T

Terry53029

Author

Intuit Community Champion

Thanks everyone for your input really appreciate it. As it was a one time thing I believe I'll go with Lisa, and doubt it will raise any eyebrows at the IRS

PATAX

Level 12

@Terry53029 @BobKamman @Just-Lisa-Now- @IRonMaN How could this be a long-term sale transaction when the house was built and sold in the same year of 2020? What was his intent when he built the house? You stated his intent when he bought the lot was for an investment. The lot is only a small fraction of the total sale price unless that lot is 100 acres... I have to lean towards Bob's answer... just my opinion....

rbynaker

Level 13

I think the improvements will have their own holding period. We discussed a similar situation last year on this thread:

https://proconnect.intuit.com/community/proseries-tax-discussions/discussion/long-term-gain-vs-short-term-gain-on-investment-real-estate/00/90897

See if you can find Rev. Rul. 75-524.

Rick

BobKamman

Level 15

Rev. Rul. 75-524 can be found at

https://www.google.com/books/edition/Internal_Revenue_Cumulative_Bulletin/7HGk-iF9ZIYC?hl=en&gbpv=1&dq=rev.+rul.+75-524&pg=PA344&printsec=frontcover

on page 342 (the second hit).

And from another source,

In Fred Draper, 32 T.C. 545 (1959), the Tax Court held that, for purposes of section 117(j) of the Internal Revenue Code of 1939, corresponding to section 1231 of the 1954 Code, the holding period of an asset begins on the date of acquisition and that such acquisition occurs progressively, in the case of a building under construction, as construction (erection) of the building is completed.

T

Terry53029

Author

Intuit Community Champion

@BobKamman It seams that ruling pertains to property held in a business, whereas this property was an investment from beginning. Really appreciate your input, and My first reaction was same as yours, but after not trying to overthink I thought " invested in lot, made improvement, sold investment" Held LT, so LT capital gains

T

TaxGuyBill

Level 15

While this is not directly for determining long or short term gain, §1031(a)-3 may show some insight (there is a similar Regulation for REITs). For example (a)(4) says:

For this section, a distinct asset is analyzed separately from any other assets to which the asset relates to determine if the asset is real property , whether as land , an inherently permanent structure , or a structural component of an inherently permanent structure . Buildings and other inherently permanent structures are distinct assets.

https://www.law.cornell.edu/cfr/text/26/1.1031(a)-3

Again, although this does not directly apply to the question, it may show some insight: When you report the sale of real estate on Form 4797, you report the land separately from the building.

PATAX

Level 12

@TaxGuyBill 👍 it sounds like that house is indeed a separate asset and not an "improvement of the lot"... An Improvement of the lot would be clearing it, grading it, putting a rain water drainage system in it, etc... Just my opinion....

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