Can I develop the lots under my primary residence ?

3 Replies

Hello all and thank you so much for maintaining such informative site. I am in TN and live in a home with its yard that turns out contains 4 lots. These lots just need to be reinstated and can be built on, a home on each. I will soon be living full 2 years in that home and my question is the following: Can I sell that home as a person to an LLC (or another form of business) in which I will have sole interest or me and my husband will? I would like to take advantage of paying no taxes on that transaction. Then I would use that lot to build 4 homes as this business undertaking and hope to have the cost of lots be part of my investment, meaning when one day I sell those new homes, I will subtract lots and cost of building from my sales, so to reduce my eventual tax on the profits. I hope this is clear enough....basically I want to sell as a person to a business entity and that business entity does the building and selling of these homes. Anyone knows? If not, who do you think would have the clear and final answer to such question? A CPA or a RE lawyer? Thank you very much ahead.

@Step Stheph - Great job asking the question. Many people wouldn't think about the tax implications of this until after the sale...and you're on the right track.

Selling land that you developed would qualify you as a "dealer/developer" and the whole gain would be ordinary income and subjected to self employment taxes. Obviously this is what you want to avoid.

The general strategy would go something like this:

Sell land to S-Corp. This structure will let you capture the capital gains on the land thus far without it triggering capital gains taxes (assuming you don't trigger any of the limitations on the sale of your personal residence, or the gains are more than the exclusion). 

Developing the lots and selling them as an S-Corp will allow you to avoid some of the SE taxes as well.

The amount you sell the land to the S-Corp will be the cost basis of the "inventory" (the lots). The building costs will be added to this inventory and will be tax deductible when you sell the property.

However, you shouldn't do this yourself:

Setting up the legal entity should likely be done by an attorney that has experience with your local laws and these types of transactions.

And talking with a real estate savvy CPA will help you avoid making mistakes you can't go back on. They'll also be able to help you determine reasonable compensation (an important aspect of S-Corps), and also help you with the cost breakouts of the sale.

Please note that I don't know every detail of your situation, so the strategy I mentioned may not completely apply to you. Be sure to talk with your CPA and Attorney who know your entire picture before actually starting any of this.

Best of luck!

@Step Stheph

You may also want to think about holding onto the property that you live in in your own name for now.
You are eligible to exclude up to 250,000(500,000 if married filing jointly) as long as you lived and owned the property for 2 out of 5 years.
If you transfer the title to an LLC - you may lose out on the appreciation as you continue to live in it.

You have a couple options regarding the other lots.

If you don't know contacts or how to develop land - you may want to consider the land outright.
If you have experience to develop land - you may want to pursue developing the land and then selling it.
option 2 will likely generate more money but also require more work.

Thank you Alan Rohrer and Basit Siddiqi so much for your replies. I don't see the way to answer to each of you individually so I will add a bit clarification here. The house sits across 3 lots so it will most likely need to go all together in a sale, rather than sell the land and keep the house. I will definitely use the lawyer to set up the Corp, I just was not sure which form of business would allow this transaction, LLC or S corp or C corp. Thank you Alan for clarifying that, I will do more research for sure. I just needed to know if this is even possible and legal. I am not necessarily trying to avoid self employment taxes, though it's a good idea, and I want to pay tax on the earned profit after the development of the land (either myself or via a hired contractor). I mostly would like to exclude the 250/500K that I am allowed for living in the house for 2 out of 5 years. And then want my corporation to take those purchased lots and develop them to earn profits. Does this still sound viable? It's not self dealing? I heard that mentioned when I asked some people here in town. Again, thanks so much, it's wonderful to ask these questions within a community that is like minded.

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