when to convert my apartments to condos

Question

Hi.  I am about to finish a three unit building and will rent the units out.  Within five years however, I will look to sell the units.  I would need then to make them into condos if I want to sell each unit separately.  I was told by an attorney that it would be best to condo them now and not wait until i decide to sell them because the IRS might consider the gains to be short term capital gains even though I have held them longer than one year.  He felt that it would be safer to condo them now even though I don't plan to sell them until later.  Firstly, does anyone know if t his is true.  Secondly, even if true, having to pay higher taxes as condos now plus the possibility of selling the entire building to one buyer later, might be a reason to not condo them now.  If anyone has any insight into this issue, please help.  Thanks.

Jorjio Hopkins · Answer

Hi @David W.,

What an awesome opportunity you have!

I think it ultimately comes down to your goals.  What are your long term goals for the property?Do you want hold the property long term, 5 years, or do you want to try and sell as quickly as possible?

When you say you're "about to finish," does that mean this is a new construction project?  Sorry for all the questions, just trying to better understand your situation.

I'm actually going through the process of getting (3) condo units converted back to a 3-unit investment.  I plan to hold this property long term, and when I eventually sell 10+ years from now I want to target an investor who will buy the entire property as a 3-unit.

Knowing your exit strategy with the property will ultimately drive your decisions on how you operate and structure the business today.

I hope this helps a little David.  If you want to tackle this conversation in more depth, please feel free to send me a private message.

David W. · Answer

Thanks.  But if i condo them right away and then rent them out, doesn't that show that I intended to sell them, in which case even if i hold them, I will be taxed as income which will be a higher tax than the long term capital gain?  Dave

Jaysen Medhurst · Answer

@David W., you have a few things going on here.

With regard to taxes, the IRS is interested in intent. The time frame isn't really the point. If you always planned on selling these, you'll likely be taxed as income, not capital gains. In that respect your attorney is right.

I think the real consideration is the market and this gets super local. If this property is in an up-and-coming neighborhood, it's worth taking a wait and see. Evaluate every couple of years and stay in touch with local agents. You may find that in 5 years this area takes off for home owners and the potential profit of a condo conversion becomes too good to pass up.

• What are the rents? 
• How much could you sell them for now if you converted them to condos? 
• What is your all-in cost now that the building is rent ready?
• How much will the conversion process cost and how long will it take.

There are a lot of things to consider here.