Long term gain

[Terry53029]

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 

[BobKamman]

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- · Accepted solution]

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.

[IRonMaN]

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.  🦆

[BobKamman]

@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."

[Terry53029]

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 

[Just-Lisa-Now-]

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?

[BobKamman]

Speaking of ducks, I think you just did that with my question.  

[PATAX]

@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....

[PATAX]

Most of the sales price was probably for the house and not the lot... The house did not sit for years and then skyrocket in price, it was built and sold in the same year of 2020... also if he actually built the house himself that would be an indication that he is a contractor and Bob's answer would definitely be right in that case...

[Just-Lisa-Now-]

What if the property already had a ramshackle house on it but in order to get someone to buy the property, you had to do a total gut and remodel.....same answer?

[rbynaker]

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...

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

Rick

[TaxGuyBill]

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.

[BobKamman]

Rev. Rul. 75-524 can be found at

https://www.google.com/books/edition/Internal_Revenue_Cumulative_Bulletin/7HGk-iF9ZIYC?hl=en&gbpv=1&...

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.

[PATAX]

@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....

[Terry53029]

Thanks @TaxGuyBill I will read your link, but I was planning on reporting on schedule d, as a LT gain, as it is not business property, but an investment

[Terry53029]

@PATAX Client is not a contractor, and did not build house himself. He is a manager in a 9-5 job in factory

[Terry53029]

@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 

[TaxGuyBill]

I'm curious why you think that the long vs short term treatment would be different for an "investment" property than for a "business" property.  It is rather clear that if it was a "business" property that the land would be long-term and the house would be short-term.  Why do you think the treatment would change if it is an "investment" rather than a "business"?

[IRonMaN]

When I originally posted, I didn't catch that it was built and sold in the same year.  But I lead a sheltered life and I'm little curious as to what I am now missing on how a house built in the same year qualifies for long term treatment.  Land yes, the house???????  But then again, after a good night's sleep, Bob's "first time for everything" comment does hold some water.  Maybe after making money on this deal, we might have decided that maybe this isn't such a bad way to make some extra minnow money. 😁

[BobKamman]

The ruling applies to business property because the question mostly arises with business deals. The issue was settled back in 1953 with the 3rd Circuit decision in Paul, but you can still try the "investment" red herring:

"The law can do many things by the use of fictions, but it would be absurd to say that it can allow a man to acquire a building in 1944 which did not come into existence until 1946. The boast of the law of taxation is that it deals with realities. The least that reality requires here is that we hold that a building cannot be acquired before it exists."

https://law.justia.com/cases/federal/appellate-courts/F2/206/763/27504/