Wanted to check in with BP and see if anyone had any experience with selling condos and any advice how on to be tax efficient.
I'm currently constructing a 37 unit condo project and plan to sell the condos individually at retail price. As I understand, most developers who do this have to pay capital gains on each of the condos and there really isn't any way to do an exchange unless I purchase 37 individual condos elsewhere. So a 1031 exchange might be out of the question.
Alternatively, instead of selling the condos, we could perhaps "lease to own" the property for 12 months in order to reclassify the condos as a long term capital gain which would result in being a taxed a lower capital gain %.
Was wondering if anyone had any experience with this and any advice.
@Jason Mak , As the developer you are not going to get capital gains out of that project - it's inventory and will be taxed that way.
I sold some land I had owned for over a year once on an installment sale to an entity that was also us once and that entity went ahead and developed and sold lots (under attorney direction at $25K for the structure). That entity paid ordinary income on the profit. But the bulk of the profit was in the installment sale which was taxed at capital gain.
The concept is called land banking and has to be done very carefully. You may have already crossed a thresh hold but it would be worth an attorney opinion.
Hi David - Thank you for taking the time to write a response to my question.
Would you mind expanding your explanation on your first sentance "you are not going to get capital gains out of that project - it's inventory and will be taxed that way".....I am under the impression that my condo sales would be taxed as short term capital gains. Can you explain your phrasing "it's inventory" and if it benefits me?
I spoke to some other folks and they recommended that I hold onto the condos for 1 year so the sales would qualify for Long term capital gains and/or 1031 exchange
@Jason Mak , Sorry it doesn't benefit you. Short term capital gains and ordinary income tax are taxed at the same rate. As a builder you created inventory in the form of condos. That inventory is just like computers at Best Buy or peanut butter at the grocery store. You bought it (created it) to sell it. As such you'll pay ordinary income and maybe self employment tax as well. In CA could be as much as 40%.
The real kicker is that because your intent is primarily to resell then you cannot do a 1031 exchange. That requires your intent to be to hold for productive use and is why some folks are recommending that you hold for a while and then 1031.
That could be a good plan if you have not debt or if your debt structure allows you to create 37 rentals. It might even be a good play for a MF syndicator out there. The idea would be that you hold them for rent and then sell and 1031. However you'll also want to be careful how you do sell them if you go that route since if you put them all up for sale at once you run the risk of still being tagged as a dealer and the multiple properties for sale could dilute the price point.
Check the comps for existing vs new construction in your area if you're thinking about that route. If they're close the holding might not be a bad deal to save 40% of the profit.
Thanks for your input dave. It's very helpful.
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